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


J. Doyne Farmer


Santa Fe Institute; LUISS Guido Carli University

John Geanakoplos


Yale University - Cowles Foundation

August 13, 2009

Cowles Foundation Discussion Paper No. 1719

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.

Number of Pages in PDF File: 18

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

JEL Classification: D91, G12

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Date posted: August 15, 2009  

Suggested Citation

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

Contact Information

J. Doyne Farmer
Santa Fe Institute ( email )
1399 Hyde Park Road
Santa Fe, NM 87501
United States
505-984-8800 (Phone)
505-982-0565 (Fax)
HOME PAGE: http://www.santafe.edu/~jdf/
LUISS Guido Carli University
viale Pola 12
Roma, Roma 00198
Italy
John Geanakoplos (Contact Author)
Yale University - Cowles Foundation ( email )
Box 208281
New Haven, CT 06520-8281
United States
203-432-3397 (Phone)
203-432-6167 (Fax)
HOME PAGE: http://cowles.econ.yale.edu/P/au/d_gean.htm
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