A Deeper Look at Hyperbolic Discounting |
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Authors: | Barry Sopher Arnav Sheth |
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Institution: | (1) Department of Economics, Rutgers University, New Brunswick, NJ 08901-1248, USA;(2) Department of Finance, Rutgers University, New Brunswick, NJ 08901-1248, USA |
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Abstract: | We conduct an experiment to investigate the degree to which deviations from exponential discounting can be accounted for by
the hypothesis of hyperbolic discounting. Subjects are asked to choose between an earlier or later payoff in a series of 40
choice questions. Each question consists of a pair of monetary amounts determined by compounding a given base amount at a
constant rate per period. Two bases (8 and 20 dollars), three compounding rates (low, medium and high) and three delays (2,
4, and 6 weeks) are each used. There are also 2 initial periods (Today and 2 weeks) and there are two separate questionnaires,
one with lower “realistic” compounding rates and the other with higher compounding rates, typical of those used in previous
studies. We analyze the detailed patterns of choice in 6 groups of 6 related questions each (in which the base and rate is
fixed but the initial period and delay varies), documenting the frequency of patterns consistent with exponential discounting
and with hyperbolic discounting. We find that exponential discounting is the clear modal choice pattern in virtually all cases.
Hyperbolic discounting is never the modal pattern (except in the sense that constant discounting is a special case of hyperbolic
discounting). We also estimate a linear probability model that takes account of individual heterogeneity. The estimates show
substantial increases in the probability of choosing the later option when the compounding rate increases, as one would expect.
There are small, sometimes significant, increases in this probability when the delay is increased or the initial period is
in the future. Such behavior is consistent with hyperbolic discounting, but can account for only a small proportion of choices.
Overall, deviations from exponential discounting appear to be due to error, or to other effects not accounted for by hyperbolic
discounting. Principal among these is an increase in later choices when the base is larger. |
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Keywords: | hyperbolic discounting modal choice payoff |
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