Complexity and Hyperbolic Discounting

Benjamin Enke, Thomas Graeber and Ryan Oprea

No 31047, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D03 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-cbe, nep-dcm, nep-des, nep-evo, nep-exp, nep-neu and nep-upt
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Citations: View citations in EconPapers (5)

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Working Paper: Complexity and Hyperbolic Discounting (2023)
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