Hyperbolic Discounting is Rational: Valuing the Far Future with Uncertain Discount Rates

18 Pages Posted: 15 Aug 2009

See all articles by J. Doyne Farmer

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; Santa Fe Institute

John Geanakoplos

Yale University; Santa Fe Institute

Date Written: August 13, 2009

Abstract

Conventional economics supposes that agents value the present vs. the future using an exponential discounting function. In contrast, experiments with animals and humans suggest that agents are better described as hyperbolic discounters, whose discount function decays much more slowly at large times, as a power law. This is generally regarded as being time inconsistent or irrational. We show that when agents cannot be sure of their own future one-period discount rates, then hyperbolic discounting can become rational and exponential discounting irrational. This has important implications for environmental economics, as it implies a much larger weight for the far future.

Keywords: Hyperbolic discounting, Environment, Time consistent, Exponential discounting, Geometric random walk, Term structure of interest rates

JEL Classification: D91, G12

Suggested Citation

Farmer, J. Doyne and Geanakoplos, John D, Hyperbolic Discounting is Rational: Valuing the Far Future with Uncertain Discount Rates (August 13, 2009). Cowles Foundation Discussion Paper No. 1719, Available at SSRN: https://ssrn.com/abstract=1448811 or http://dx.doi.org/10.2139/ssrn.1448811

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

HOME PAGE: http://www.inet.ox.ac.uk/people/view/4

Santa Fe Institute ( email )

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Santa Fe, NM 87501
United States
505-984-8800 (Phone)
505-982-0565 (Fax)

HOME PAGE: http://www.santafe.edu/~jdf/

John D Geanakoplos (Contact Author)

Yale University ( email )

30 Hillhouse Avenue
New Haven, CT 06511
United States
203-432-3397 (Phone)

HOME PAGE: http://https://economics.yale.edu/people/faculty/john-geanakoplos

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

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