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Quasi-exponential discounting

Author

Listed:
  • Stephen L. Cheung
  • Kieran MacGibbon
  • Arquette Milin-Byrne
  • Agnieszka Tymula

Abstract

Alternatives to the standard model of time preference typically relax the assumption of an exponential discount function while retaining the framework of discounted utility. We report novel behavioural data inconsistent with this approach. Illustrating this claim, we estimate highly significant quasi-hyperbolic “present bias” (β = 0.833, smaller than 1 with p < 0.0001), despite our data exhibiting stationarity. The puzzle is resolved by relaxing discounted utility itself to allow discounting to be context dependent. We propose quasi-exponential discounting (QED) – a fixed penalty applied to all instances of delay, not only ones that begin in the present – as a particularly simple member of this class of models. This provides an excellent approximation to the best-fitting models, while retaining the analytical simplicity and ease of interpretation that have made exponential and quasi-hyperbolic discounting attractive in economic theory.

Suggested Citation

  • Stephen L. Cheung & Kieran MacGibbon & Arquette Milin-Byrne & Agnieszka Tymula, 2024. "Quasi-exponential discounting," Working Papers 2024-16, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2024-16
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    Keywords

    time preference; present bias; stationarity; relative discounting.;
    All these keywords.

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