References (19)



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

J. Doyne Farmer

Institute for New Economic Thinking; Santa Fe Institute

John Geanakoplos

Yale University - Cowles Foundation

August 13, 2009

Cowles Foundation Discussion Paper No. 1719

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

Open PDF in Browser Download This Paper

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
Institute for New Economic Thinking ( 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 )
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/
John D 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
Feedback to SSRN

Paper statistics
Abstract Views: 1,157
Downloads: 278
Download Rank: 79,246
References:  19

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 2.469 seconds