Hacker News new | ask | show | jobs
by davetannenbaum 4994 days ago
The reason why it is usually considered irrational/illogical is because hyperbolic discounting leads to dynamically inconsistent preferences. For example, under hyperbolic discounting I may prefer $100 today to $150 in one month, but prefer $150 in 61 months to $100 in 60 months. It's the same rate of discounting in both cases ($50 for an additional month of delay) but my preferences are not consistent.

Of course, there are other criteria for rationality besides coherence/consistency (as the wikipedia article alludes to).
2 comments
pessimizer 4994 days ago
But if you view the payoff as not certain, $100 now is worth a lot more than $150 in a month - because you are here now with $100. The $150 is worth its normal discount rate multiplied by the strength of the probability that you will be here in a month with $150. The discount rate here is entirely due differences in risk of nonpayment - which are marginal when comparing 60 months to 61 months, but massive when comparing now to an hour from now.

According to criteria that would label hyperbolic discounting irrational or illogical, debt collectors are equally confused for not accepting the promise of a $100,000 payoff 50 years from now rather than a settling of the debt today.

link
LeBleu 4994 days ago
That's because the traditional economic definition of "rational" is an incomplete model of real world sanity that only works in incomplete models of the real world.

In the real world, you have to deal with the uncertain risk that the offer will be unfulfilled due to external factors, which always increases in time relative to present. You, the entity offering you the choice, or the entire environment both exist in, may not still exist in 60 months.

If the same offer is made 60 months from now, you should make a different choice, because the risk of non-existence between time of choice and time of reward has changed.

If the amount of hyperbolic discounting is genetically determined, then is likely that we are still adjusting to the massive drop in risk of death over the past several centuries.

link