Temporal Discounting

A nontrivial task is to decide how much weight to give to outcomes extended into the distant future. Various forms of uncertainty (regarding nature, one's own tastes, and so on) justify some degree of discounting in calculating the present value of future goods. Thus, $1000 received next year is typically worth less than $1000 received today. As it turns out, observed discount rates tend to be unstable and often influenced by factors, such as the size of the good and its temporal distance, that are not subsumed under standard normative analyses (see Ainslie, 2001; Frederick, Loewenstein, &Donoghue, 2002; Loewenstein & Thaler, 1989, for review). For example, although some people prefer an apple today over two apples tomorrow, virtually nobody prefers one apple in 30 days over two apples in 31 days (Thaler, 1981). Because discount functions are non-exponential (see also Loewenstein & Prelec, 1992), a 1 -day delay has greater impact when that day is near than when it is far. Similarly, when asked what amount of money in the future would be comparable to receiving a specified amount today, people require about $60 in 1 year to match $15 now, but they are satisfied with $4000 in a year instead of $3000 today. This implies discount rates of 300% in the first case and of 33 % in the second. To the extent that one engages in a variety of transactions throughout time, imposing wildly disparate discount rates on smaller versus larger amounts ignores the fact that numerous small amounts will eventually add up to be larger, yielding systematic inconsistency.

Excessive discounting turns into myopia, which is often observed in people's attitudes toward future outcomes (see, e.g., Elster, 1984; Elster & Loewenstein, 1992). Loewenstein and Thaler (1989) discussed a West Virginia experiment in which the high school dropout rate was reduced by one-third when dropouts were threatened with the loss of their driving privileges. This immediate consequence apparently had a significantly greater impact than the far more serious but more distant socioeconomic implications of failing to graduate from high school. These authors also mention physicians' typical lament that warning about the risk of skin cancer from excessive sun exposure has less effect than the warning that such exposure can cause large pores and acne. In fact, "quit smoking" campaigns have begun to stress the immediate benefits of quitting (quick reduction in the chance of a heart attack, improved ability to taste foods within 2 days, and such) even more prominently than the long-term benefits (American Lung Association, 2003). Similar reasoning applies in the context of promoting safe sex practices and medical self-examinations, where immediate gratification or discomfort often trumps much greater, but temporally distant, considerations. Schelling (1980, 1984) thought about similar issues of self-control in the face of immediate temptation as involving multiple "selves"; it is to related considerations of alternate frames of mind that we turn next.

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