Complexity and Hyperbolic Discounting

Benjamin Enke, Thomas Graeber, Ryan Oprea and Thomas W. Graeber

No 10861, CESifo Working Paper Series from CESifo

Abstract: A large literature shows that people discount financial rewards hyperbolically instead of exponentially. While discounting of money has been questioned as a measure of time preferences, it continues to be highly relevant in empirical practice and predicts a wide range of real-world behaviors, creating a need to understand what generates the hyperbolic pattern. We provide evidence that hyperbolic discounting reflects mistakes that are driven by the complexity of evaluating delayed payoffs. In particular, we document that hyperbolicity (i) is strongly associated with choice inconsistency and cognitive uncertainty, (ii) increases in overt complexity manipulations and (iii) arises nearly identically in computationally similar tasks that involve no actual payoff delays. Our results suggest that even if people had exponential discount functions, complexity-driven mistakes would cause them to make hyperbolic choices. We examine which experimental techniques to estimate present bias are (not) confounded by complexity.

Keywords: hyperbolic discounting; present bias; bounded rationality; cognitive uncertainty (search for similar items in EconPapers)
JEL-codes: C91 D91 G00 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cbe, nep-dem, nep-exp, nep-neu and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Complexity and Hyperbolic Discounting (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10861

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