Shapes of discounting
Economists traditionally modeled discounting exponentially, with value falling by a constant proportion per unit of time. George Ainslie and others found that behavior often fits a hyperbolic curve better, with value dropping steeply at first and flattening later. This allows preference reversals: a person might prefer the larger reward when both options are distant, and then switch as the smaller one draws near.
- Exponential: consistent preferences over time
- Hyperbolic: preference reversals and impulsive switches
- Quasi-hyperbolic: a special premium on the immediate present, as modeled by David Laibson
Measurement and correlates
Researchers usually present a series of choices between smaller-sooner and larger-later options. Steeper discounting has been associated with substance use and other difficulties in self-regulation, and is often examined as a marker across clinical conditions. Associations are generally modest, and causal direction is not always clear.
Why people differ
Frederick, Loewenstein, and O'Donoghue's review showed that estimated discount rates vary widely, depending on method and on the type of reward. A steep discount is not necessarily irrational. If the future is uncertain, money is scarce, or a promise may not be honored, taking the immediate option can be sensible. Hypothetical rewards frequently resemble real ones in studies, but concerns remain. Discounting is also susceptible to framing, which complicates its treatment as a stable personal trait.
Further reading
- Ainslie, G. (1975). Specious reward: A behavioral theory of impulsiveness and impulse control. Psychological Bulletin, 82(4).
- Laibson, D. (1997). Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112(2).
- Frederick, S., Loewenstein, G., & O'Donoghue, T. (2002). Time discounting and time preference: A critical review. Journal of Economic Literature, 40(2).