People are Not Exponential Discounters, and That’s OK

Some Notions Drawn, as I Recall, from Rabin (2002) and Frederick, Loewenstein, and O'Donoghue (2002)

• Would you rather have $20 now or $21 one week from now? If you choose the immediate $20 – a perfectly reasonable choice – then you discount monetary rewards by at least 5 percent per week. Would you rather have $20 now, or $250 one year from now? If you are an exponential discounter, and you preferred the immediate $20 in the initial situation, then you must prefer the immediate $20 to $250 one year hence, as 1.05 to the 52nd power is more than 12.6. If the question concerned two years from now, you would turn down $3100 in two years’ time for an immediate $20.

• Would you rather have $20 now or $22 one week from now? If you chose the immediate $20, then you discount by at least 10 percent per week. Would you rather have $20 now, or $2800 one year from now? If you are an exponential discounter, you must still want the $20, as 1.10 to the 52nd power is more than 140. In two years’ time, you’d turn down $400,000 (1.1 to the 104th power is more than 20,000) for an immediate $20. 

• Rabin showed that the sort of risk aversion over small-stakes gambles that most people display is inconsistent with expected utility theory, because such behavior would necessitate crazy choices for higher stakes gambles. What is demonstrated above is rather analogous, that the sort of time preference that people display for small stakes, short time-frame situations is not consistent with exponential discounting, because it would necessitate crazy choices for longer time-frame choices.