Hyperbolic Discounting
Preference for smaller-sooner over larger-later rewards, with declining discount rate over time.
Hyperbolic discounting describes the empirical pattern by which the discount rate people apply to future rewards declines with the time horizon — implying preference reversals as choices come closer in time — in contrast to the constant-rate exponential discounting assumed in standard intertemporal economics. George Ainslie documented the pattern experimentally in animals and humans from the 1970s, and David Laibson's 1997 'Golden Eggs' paper introduced the tractable quasi-hyperbolic (β-δ) discounting formulation that has become workhorse in applied behavioral economics, capturing 'present bias' as a single additional parameter on near-term payoffs. The framework provides a parsimonious explanation for procrastination, undersaving, addiction, and demand for commitment devices, and it underlies the design of pension auto-enrollment and similar default-based interventions.
Core components
- Declining discount rate with horizon
- Preference reversals as time approaches
- Quasi-hyperbolic (β-δ) discount function
- Present bias parameter (β)
- Sophisticated vs naïve agents (anticipating own time-inconsistency vs not)
- Commitment devices
Primary use case
Explaining procrastination, undersaving, addiction, and demand for commitment; designing pension auto-enrollment and default-based interventions; sin-tax rationale; analysis of dynamic inconsistency in policy.
Common criticisms
- Empirical evidence does not always cleanly distinguish hyperbolic discounting from exponential discounting under uncertainty about future utility
- β-δ may not capture the full structure of observed time inconsistencies
- alternative specifications (subadditive discounting, attribute models) fit some data better
- experimental measurement is sensitive to elicitation method
- some apparent present bias may reflect liquidity constraints or other rational considerations.
Lineage
- Child of
- Behavioral Economics
- Siblings
- Loss Aversion, Mental Accounting, Prospect Theory, Behavioral Economics
- Derived from
- Behavioral Economics