Munich Personal RePEc Archive

A Deeper Look at Hyperbolic Discounting

Sopher, Barry and Sheth, Arnav (2006): A Deeper Look at Hyperbolic Discounting. Published in: Theory and Decision , Vol. 60, No. 2-3 (May 2006): pp. 219-255.

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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 com- pounding 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 ana- lyze 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 exponen- tial discounting and with hyperbolic discounting. We find that exponen- tial 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 probabil- ity 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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