Philosophy Paper

American Economic Association
Time Discounting and Time Preference: A Critical Review

Author(s): Shane Frederick, George Loewenstein and Ted O'Donoghue
Source: Journal of Economic Literature, Vol. 40, No. 2 (Jun., 2002), pp. 351-401
Published by: American Economic Association
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Journal of Economic Literature
Vol. XL (June 2002), pp. 351-401
T ime Discounting and T ime
Preference: A C ritical R ev iew
SHA NE FR EDER IC K, GEOR GE LOEWENST EIN,
and T ED O'DONOGHUE'
1. Introd uction
I NT ER T EMPOR A L C HOIC ES-d ecisions
inv olv ing trad eoffs among costs and
benefits occurring at d ifferent times-
are important and ubiquitous. Such d eci-
sions not only affect one's health, w ealth,
and happiness, but, may also, as A d am
Smith first recognized , d etermine the
economic prosperity of nations. In this
paper, w e rev iew empirical research on
intertemporal choice, and present an
ov erv iew of recent theoretical formula-
tions that incorporate insights gained
from this research.
Economists' attention to intertempo-
ral choice began early in the history of
the d iscipline. Not long after A d am
Smith called attention to the impor-
tance of intertemporal choice for the
w ealth of nations, the Scottish economist
John R ae w as examining the sociologi-
cal and psychological d eterminants of
these choices. In section 2, w e briefly
rev iew the perspectiv es on intertempo-
ral choice of R ae and nineteenth- and
early tw entieth-century economists, and
d escribe how these early perspectiv es
interpreted intertemporal choice as
the joint prod uct of many conflicting
psychological motiv es.
A ll of this changed w hen Paul Sam-
uelson proposed the d iscounted -utility
(DU) mod el in 1937. Despite Samuel-
son's manifest reserv ations about the
normativ e and d escriptiv e v alid ity of
the formulation he had proposed , the
DU mod el w as accepted almost in-
stantly, not only as a v alid normativ e
stand ard for public policies (e.g., in cost-
benefit analyses), but as a d escriptiv ely
accurate representation of actual behav -
ior. A central assumption of the DU
mod el is that all of the d isparate mo-
tiv es und erlying intertemporal choice can
be cond ensed into a single parameter-
the d isc.ount rate. In section 3 w e exam-
ine this and many other assumptions
und erlying the DU mod el. We d o not
present an axiomatic d eriv ation of the
mod el, but instead focus on those
features that highlight the implicit
psychological assumptions und erlying
the mod el.
1
Fred erick: Sloan School of Management, Mas-
sachusetts Institute of T echnology. Loew enstein:
Department of Social and Decision Sciences,
C arnegie Mellon Univ ersity. O'Donoghue: De-
partment of Economics, C ornell Univ ersity. We
thank C olin C amerer, Dav id Laibson, John
McMillan, Drazen Prelec, Daniel R ead , Nachum
Sicherman, Duncan Simester, and three anony-
mous referees for useful comments. We thank
C ara. Barber, R osa Blackw ood , Mand ar Oak, and
R osa Stipanov ic for research assistance. For finan-
cial support, Fred erick and Loew enstein thank the
Integrated Stud y of the Human Dimensions of
Global C hange at C arnegie Mellon Univ ersity
(NSF Grant SBR -9521914), and O'Donoghue
thanks the National Science Found ation (A w ard
SE'S-0078796).
351
352 Journal of Economic Literature, Vol. XL (June 2002)
Samuelson's reserv ations about the
d escriptiv e v alid ity of the DU mod el
w ere justified . Section 4 rev iew s
the grow ing list of "DU anomalies"-
patterns of choice that are inconsistent
w ith the mod el's theoretical pred ic-
tions. Virtually ev ery assumption und er-
lying the DU mod el has been tested
and found to be d escriptiv ely inv alid in
at least some situations. Moreov er, as
w e d iscuss at the end of the section,
these anomalies are not anomalies in the
sense that they are regard ed as errors
by the people w ho commit them. Unlike
many of the better-know n expected -
utility anomalies, the DU anomalies d o
not necessarily v iolate any stand ard or
principle that people believ e they
should uphold .
T he insights about intertemporal
choice gleaned from this empirical re-
search hav e led to the proposal of nu-
merous alternativ e theoretical mod els,
w hich w e rev iew in section 5. Some of
these mod ify the d iscount function, per-
mitting, for example, d eclining d iscount
rates or "hyperbolic d iscounting." Oth-
ers introd uce ad d itional arguments into
the utility function, such as the utility
of anticipation. Still others d epart from
the DU mod el more rad ically, by in-
clud ing, for instance, systematic mis-
pred ictions of future utility. Many of
these new theories rev iv e psychological
consid erations d iscussed by R ae and
other early economists that w ere extin-
guished w ith the ad option of the DU
mod el and its expression of intertem-
poral preferences in terms of a single
parameter.
In section 6, w e rev iew attempts to
estimate d iscount rates. While the DU
mod el assumes that people are charac-
terized by a single d iscount rate, this
literature rev eals spectacular v ariation
across (and ev en w ithin) stud ies. T he
failure of this research to conv erge to-
w ard any agreed -upon av erage d iscount
rate stems partly from d ifferences in
elicitation proced ures. But it also stems
from the faulty assumption that the v ar-
ied consid erations that are relev ant in
intertemporal choices apply equally to
d ifferent choices and thus that they can
all be sensibly represented by a single
d iscount rate.
T hroughout the paper, w e stress the
importance of d istinguishing among the
v aried consid erations that und erlie in-
tertemporal choices. We d istinguish
time d iscounting from time preference.
We use the term time d iscounting
broad ly to encompass any reason for
caring less about a future consequence,
includ ing factors that d iminish the ex-
pected utility generated by a future
consequence, such as uncertainty or
changing tastes. We use the term time
preference to refer, more specifically, to
the preference for immed iate utility
ov er d elayed utility. In section 7, w e
push this theme further, by examining
w hether time preference itself might
consist of d istinct psychological traits
that can be separately analyzed . Section
8 conclud es.
2. Historical Origins of the Discounted
Utility Mod el
T he historical d ev elopments that cul-
minated in the formulation of the DU
mod el help to explain the mod el's limi-
tations. Each of the major figures in the
d ev elopment of the DU mod el-John
R ae, Eugen v on B6hm-Baw erk, Irv ing
Fisher, and Paul Samuelson-built
upon the theoretical framew ork of his
pred ecessors, d raw ing on little more
than introspection and personal obser-
v ation. When the DU mod el ev entually
became entrenched as the d ominant
theoretical framew ork for mod eling in-
tertemporal choice, it w as d ue largely to
its simplicity and its resemblance to the
familiar compound interest formula,
Fred erick, Loew enstein, and O'Donoghue: T ime Discounting 353
and not as a result of empirical research
d emonstrating its v alid ity.
Intertemporal choice became firmly
established as a d istinct topic in 1834,
w ith John R ae's publication of T he So-
ciological T heory of C apital. Like A d am
Smith, R ae sought to d etermine w hy
w ealth d iffered among nations. Smith
had argued that national w ealth w as d e-
termined by the amount of labor allo-
cated to the prod uction of capital, but
R ae recognized that this account w as in-
complete because it failed to explain
the d eterminants of this allocation. In
R ae's v iew , the missing element w as
"the effectiv e d esire of accumulation"-a
psychological factor that d iffered across
countries and d etermined a society's
lev el of sav ing and inv estment.
A long w ith inv enting the topic of in-
tertemporal choice, R ae also prod uced
the first in-d epth d iscussion of the psy-
chological motiv es und erlying inter-
temporal choice. R ae believ ed that
intertemporal-choice behav ior w as the
joint prod uct of factors that either pro-
moted or limited the effectiv e d esire of
accumulation. T he tw o main factors
that promoted the effectiv e d esire of
accumulation w ere the bequest motiv e
("the prev alence throughout the society
of the social and benev olent affections,"
p. 58) and the propensity to exercise
self-restraint ("the extent of the intel-
lectual pow ers, and the consequent
prev alence of habits of reflection, and
prud ence, in the mind s of the mem-
bers of society," p. 58). One limiting
factor w as the uncertainty of human
life:
When engaged in safe occupations, and liv ing
in healthy countries, men are much more apt
to be frugal, than in unhealthy, or hazard ous
occupations, and in climates pernicious to hu-
man life. Sailors and sold iers are prod igals.
In the West Ind ies, New Orleans, the East
Ind ies, the expend iture of the inhabitants is
profuse. T he same people, coming to resid e
in the healthy parts of Europe, and not get-
ting into the v ortex of extrav agant fashion,
liv e economically. War and pestilence hav e
alw ays w aste and luxury, among the other ev ils
that follow in their train. (R ae 1834, p. 57)
A second factor that limited the ef-
fectiv e d esire of accumulation w as the
excitement prod uced by the prospect of
immed iate consumption, and the con-
comitant d iscomfort of d eferring such
av ailable gratifications:
Such pleasures as may now be enjoyed gener-
ally aw aken a passion strongly prompting to
the partaking of them. T he actual presence of
the immed iate object of d esire in the mind by
exciting the attention, seems to rouse all the
faculties, as it w ere to fix their v iew on it, and
lead s them to a v ery liv ely conception of the
enjoyments w hich it offers to their instant
possession. (R ae 1834, p. 120)
A mong the four factors that R ae id en-
tified as the joint d eterminants of time
preference, one can glimpse tw o fund a-
mentally d ifferent v iew s. One, w hich w as
later championed by William S. Jev ons
(1888) and his son, Herbert S. Jev ons
(1905), assumes that people care only
about their immed iate utility, and ex-
plains farsighted behav ior by postulat-
ing utility from the anticipation of
future consumption. On this v iew , d e-
ferral of gratification w ill occur only if
it prod uces an increase in "anticipal"
utility that more than compensates for
the d ecrease in immed iate consumption
utility. T he second perspectiv e assumes
equal treatment of present and future
(zero d iscounting) as the natural base-
line for behav ior, and attributes the
ov erw eighting of the present to the
miseries prod uced by the self-d enial
required to d elay gratification. N. W.
Senior, the best-know n ad v ocate of this
"abstinence" perspectiv e, w rote, "T o
abstain from the enjoyment w hich is in
our pow er, or to seek d istant rather
than immed iate results, are among the
most painful exertions of the human
w ill" (Senior 1836, p. 60).
T he anticipatory-utility and absti-
nence perspectiv es share the id ea that
intertemporal trad eoffs d epend on im-
med iate feelings-in one case, the im-
med iate pleasure of anticipation, and in
the other, the immed iate d iscomfort of
self-d enial. T he tw o perspectiv es, how -
ev er, explain v ariability in intertemporal-
choice behav ior in d ifferent w ays. T he
anticipatory-utility perspectiv e attrib-
utes v ariations in intertemporal-choice
behav ior to d ifferences in people's
abilities to imagine the future and to
d ifferences in situations that promote
or inhibit such mental images. T he ab-
stinence perspectiv e, on the other hand ,
explains v ariations in intertemporal-
choice behav ior on the basis of ind iv id -
ual and situational d ifferences in the
psychological d iscomfort associated w ith
self-d enial. In this v iew , one should
observ e high rates of time d iscounting
by
people
w ho find it painful to d elay
gratification, and in situations in w hich
d eferral is generally painful e.g., w hen
one is, as R ae w ord ed it, in the "actual
presence of the immed iate object of
d esire."
Eugen v on Bohm-Baw erk, the next
major figure in the d ev elopment of the
economic perspectiv e on intertemporal
choice, ad d ed a new motiv e to the list
proposed by R ae, Jev ons, and Senior,
arguing that humans suffer from a
systematic tend ency to und erestimate
future w ants:
It may be that w e possess inad equate pow er
to imagine and to abstract, or that w e are not
w illing to put forth the necessary effort, but
in any ev ent w e limn a more or less incom-
plete picture of our future w ants and espe-
cially of the remotely d istant ones. A nd
then there are all those w ants that nev er
come to mind at all. (Bohm-Baw erk 1889, pp.
268-69)2
B6hm-Baw erk's analysis of time pref-
erence, like those of his pred ecessors,
w as heav ily psychological, and much of
his v oluminous treatise, C apital and
Interest, w as d ev oted to d iscussions of
the psychological constituents of time
preference. How ev er, w hereas the early
v iew s of R ae, Senior, and Jev ons ex-
plained intertemporal choices in terms
of motiv es that are uniquely associated
w ith time, B6hm-Baw erk began mod el-
ing intertemporal choice in the same
terms as other economic trad eoffs-as a
"technical" d ecision about allocating re-
sources (to oneself) ov er d ifferent points
in time, much as one w ould allocate
resources betw een any tw o competing
interests, such as housing and food .
B6hm-Baw erk's treatment of inter-
temporal choice as an allocation of con-
sumption among time period s w as for-
malized a d ecad e later by the A merican
economist Irv ing Fisher (1930). Fisher
plotted the intertemporal consumption
d ecision on a tw o-good ind ifference
d iagram, w ith consumption in the cur-
rent year on the abscissa, and consump-
tion in the follow ing year on the ord i-
nate. T his representation mad e clear
that a
person's
observ ed (marginal)
rate of time preference-the marginal
rate of substitution at her chosen con-
sumpti-on bund le-d epend s on tw o
consid erations: time preference and d i-
minishing marginal utility. Many econo-
mists hav e subsequently expressed d is-
comfort w ith using the term "time
preference" to includ e the effects of d if-
ferential marginal utility arising from
unequal consumption lev els betw een
time period s (see in particular Mancur
Olson and Martin Bailey 1981). In
Fisher's formulation, pure time prefer-
ence can be interpreted as the marginal
2
In a frequently cited passage from T he Eco-
nomics of Welfare, A rthur Pigou (1920) proposed
a similar account of time preference, suggesting
that it results from a type of cognitiv e illusion: "our
telescopic faculty is d efectiv e, and w e, therefore,
see future pleasures, as it w ere, on a d iminished
scale."
rate of substitution on the d iagonal,
w here consumption is equal in both
period s.
Fisher's w ritings, like those of his
pred ecessors, includ ed extensiv e d iscus-
sions of the psychological d eterminants
of time preference. Like B6hm-Baw erk,
he ld ifferentiated "objectiv e factors,"
such as projected future w ealth and
risk, from "personal factors." Fisher's
list of personal factors includ ed the four
d escribed by R ae, "foresight" (the abil-
ity to imagine future w ants-the inv erse
of the d eficit that Bohm-Baw erk postu-
lated ), and "fashion," w hich Fisher be-
liev ed to be "of v ast importance . . . in
its influence both on the rate of interest
and on the d istribution of w ealth itself."
(Fisher 1930, p. 88):
T he most fitful of the causes at w ork is prob-
ably fashion. T his at the present time acts,
on the one hand , to stimulate men to sav e
and become millionaires, and , on the other
hand , to stimulate millionaires to liv e in an
ostentatious manner. (Fisher 1930, p. 87)
Hence, in the early part of the tw en-
tieth century, "time preference" w as
v iew ed as an amalgamation of v arious
intertemporal motiv es. While the DU
mod el cond enses these motiv es into the
d iscount rate, w e w ill argue that resur-
recting these d istinct motiv es is crucial
for und erstand ing intertemporal choices.
3. T he Discounted Utility Mod el
In 1937, Paul Samuelson introd uced
the DU mod el in a fiv e-page article
titled "A Note on Measurement of Util-
ity." Samuelson's paper w as intend ed to
offer a generalized mod el of intertem-
poral choice that w as applicable to mul-
tiple time period s (Fisher's graphical
ind ifference-curv e analysis w as d ifficult
to extend to more than tw o time peri-
od s) and to make the point that repre-
senting intertemporal trad eoffs re-
quired a card inal measure of utility. But
in Samuelson's simplified mod el, all the
psychological concerns d iscussed ov er the
prev ious century w ere compressed into
a single parameter, the d iscount rate.
T he DU mod el specifies a d ecision
maker's intertemporal preferences ov er
consumption profiles (C t,.. .,C T ). Und er
the usual assumptions (completeness,
transitiv ity, and continuity), such pref-
erences can be represented by an in-
tertemporal utility function Ut(C t,...,C T ).
T he DU mod el goes further, by as-
suming that a person's intertemporal
utility function can be d escribed by the
follow ing special functional form:
T
-
t
Ut(C t,...,C T )
=
E D(k)u(ct+ k)
k=O , k
w here D(k) =
l+p
In this formulation, U(C t+k) is often inter-
preted as the person's card inal instanta-
neous utility function-her w ell-being in
period t + k-and D(k) is often inter-
preted as the person's d iscount func-
tion-the relativ e w eight she attaches, in
period t, to her w ell-being in period t + k.
p represents the ind iv id ual's pure rate
of time preference (her d iscount rate),
w hich is meant to reflect the collectiv e
effects of the "psychological" motiv es
d iscussed in section 2.3
Samuelson d id not end orse the DU
mod el as a normativ e mod el of in-
tertemporal choice, noting that "any
connection betw een utility as d iscussed
here and any w elfare concept is d is-
av ow ed " (p. 161). He also mad e no
claims on behalf of its d escriptiv e v alid -
ity, stressing, "It is completely arbitrary
to assume that the ind iv id ual behav es so
as to maximize an integral of the form
env isaged in [the DU mod el]" (p. 159).
How ev er, d espite Samuelson's manifest
3T he continuous-time analogue is Ut({C tlt e [t,T ]) =
__t e
- P(
-
t)u(ct). For expositional ease, w e shall
restrict attention to d iscrete-time throughout.
reserv ations, the simplicity and ele-
gance of this formulation w as irresist-
ible, and the DU mod el w as rapid ly
ad opted as the framew ork of choice for
analyzing intertemporal d ecisions.
T he DU mod el receiv ed a scarcely
need ed further boost to its d ominance
as the stand ard mod el of intertemporal
choice w hen T jalling C . Koopmans
(1960) show ed that the mod el could be
d eriv ed from a superficially plausible
set of axioms. Koopmans, like Samuel-
son, d id not argue that the DU mod el
w as psychologically or normativ ely
plausible; his goal w as only to show that
und er some w ell-specified (though ar-
guably unrealistic) circumstances, in-
d iv id uals w ere logically compelled to
possess positiv e time preference. Pro-
d ucers of a prod uct, how ev er, cannot
d ictate how the prod uct w ill be used ,
and Koopmans' central technical mes-
sage w as largely lost w hile his axiom-
atization of the DU mod el helped to
cement its popularity and bolster its
perceiv ed legitimacy.
In the remaind er of this section, w e
d escribe some important features of the
DU mod el as it is commonly used by
economists, and briefly comment on the
normativ e and positiv e v alid ity of these
assumptions. T hese features d o not rep-
resent an axiom system-they are nei-
ther necessary nor sufficient cond itions
for the DU mod el-but are intend ed
to highlight the implicit psychological
assumptions und erlying the mod el.4
3.1 Integration of New A lternativ es
w ith Existing Plans
A central assumption in most mod els
of intertemporal choice-includ ing the
DU mod el-is that a person ev aluates
new alternativ es by integrating them
w ith her existing plans. T o illustrate,
consid er a person w ith an existing con-
sumption plan (C t,...,C T ) w ho is offered
an intertemporal-choice prospect X,
w hich might be something like an op-
tion to giv e up $5000 tod ay to receiv e
$10,000 in fiv e years. Integration means
that prospect X is not ev aluated in isola-
tion, but in light of how it changes the
person's aggregate consumption in all
future period s. T hus, to ev aluate the
prospect X, the person must choose w hat
her new consumption path
(C 't, .,C fT )
w ould be if she w ere to accept prospect
X, and should accept the prospect if
Ut(C 't, . .,C T )
>
Ut(ct.- * .,C T ).
A n alternativ e w ay to und erstand in-
tegration is to recognize that intertem-
poral prospects alter a person's bud get
set. If the person's initial end ow ment is
Eo, then accepting prospect X w ould
change her end ow ment to Eo u X. Let-
ting B(E) d enote the person's bud get
set giv en end ow ment E-i.e., the set of
consumption streams that are feasible
giv en end ow ment E-the DU mod el
says that the person should accept
prospect X if:
T
IC
-t
max
(,
C t
u(c)
(C t, ,C T )
e B(Eo U X) Xt yP )
T
m T t
> 'max
I;(
u
(c).
( C t, ,cT )
e B(Eo) X= t
While integration seems normativ ely
compelling, it may be too d ifficult to
actually d o. A person may not hav e
w ell-formed plans about future con-
sumption streams, or be unable (or un-
w illing) to recompute the new optimal
plan ev ery time she makes an intertem-
poral choice. Some of the ev id ence w e
rev iew below supports the plausible
presumption that people ev aluate the
results of intertemporal choices ind e-
pend ently of any expectations they hav e
4 T here are sev eral d ifferent axiom systems for
the DU mod el-in ad d ition to Koopmans, see
Peter Fishburn (1970), K. J. Lancaster (1963),
R ichard F. Meyer (1976), and Fishburn and A riel
R ubinstein (1982).
regard ing consumption in future time
period s.
3.2 Utility Ind epend ence
T he DU mod el explicitly assumes that
the ov erall v alue-or "global utility"-
of a sequence of outcomes is equal to
the (d iscounted ) sum of the utilities in
each period . Hence, the d istribution of
utility across time makes no d ifference
beyond that d ictated by d iscounting,
w hich (assuming positiv e time prefer-
ence) penalizes utility that is experi-
enced later. T he assumption of utility
ind epend ence has rarely been d iscussed
or challenged , but its implications are
far from innocuous. It rules out any
kind of preference for patterns of utility
ov er time-e.g., a preference for a flat
utility profile ov er a roller-coaster util-
ity profile w ith the same d iscounted
utility.5
3.3 C onsumption Ind epend ence
T he DU mod el explicitly assumes that
a person's w ell-being in period t + k is
ind epend ent of her consumption in any
other period -i.e., that the marginal
rate of substitution betw een consump-
tion in period s t and T ' is ind epend ent
of consumption in period t".
C onsumption ind epend ence is analo-
gous to, but fund amentally d ifferent from,
the ind epend ence axiom of expected -
utility theory. In expected -utility the-
ory, the ind epend ence axiom specifies
that preferences ov er uncertain pros-
pects are not affected by the conse-
quences that the prospects share-i.e.,
that the utility of an experienced out-
come is unaffected by other outcomes
that one might hav e experienced (but
d id not). In intertemporal choice, con-
sumption ind epend ence says that pref-
erences ov er consumption profiles are
not affected by the nature of consump-
tion in period s in w hich consumption is
id entical in the tw o profiles-i.e., that
an outcome's utility is unaffected by
outcomes experienced in prior or future
period s. For example, consumption in-
d epend ence says that a person's prefer-
ence betw een an Italian and T hai res-
taurant tonight should not d epend on
w hether she had Italian last night, nor
w hether she expects to hav e it tomor-
row . A s the example suggests, and as
Samuelson and Koopmans both recog-
nized , there is no compelling rationale
for such an assumption. Samuelson
(1952, p. 674) noted that, "the amount
of w ine I d rank yesterd ay and w ill d rink
tomorrow can be expected to hav e ef-
fects upon my tod ay's ind ifference
slope betw een w ine and milk." Simi-
larly, Koopmans (1960, p. 292) acknow l-
ed ged that, "One cannot claim a high
d egree of realism for [the ind epen-
d ence assumption], because there is no
clear reason w hy complementarity of
good s could not extend ov er more than
one time period ."
3.4 Stationary Instantaneous Utility
When applying the DU mod el to spe-
cific problems, it is often assumed that
the card inal instantaneous utility func-
tion
u(c,)
is constant across time, so that
the w ell-being generated by any activ ity
is the same in d ifferent period s. Most
economists w ould acknow led ge that sta-
tionarity of the instantaneous utility
function is not sensible in many situ-
ations, because people's preferences d o,
in fact, change ov er time in pred ictable
5"Utility ind epend ence" has meaning only if
one literally interprets u(ct+k) as w ell-being expe-
rienced in period t + k. We believ e that this is, in
fact, the common interpretation. For a mod el that
relaxes the assumption of utility ind epend ence,
see Benjamin Hermalin and A lice Isen (2000),
w ho consid er a mod el in w hich w ell-being in
period t d epend s on w ell-being in period t - 1-
i.e., they assume ut = u(ct, ut-1). See also Daniel
Kahneman, Peter Wakker, and R akesh Sarin
(1997) w ho propose a set of axioms that w ould
justify an assumption of ad d itiv e separability in
instantaneous utility.
and unpred ictable w ays. T hough this
unrealistic assumption is often retained
for analytical conv enience, it becomes less
d efensible as economists gain insight
into how tastes change ov er time (see
Loew enstein and A ngner, forthcoming,
for a d iscussion of d ifferent sources of
preference change).6
3.5 Ind epend ence of Discounting
from C onsumption
T he DU mod el assumes that the d is-
count function is inv ariant across all
forms of consumption. T his feature is
crucial to the notion of time preference.
If people d iscount utility from d ifferent
sources at d ifferent rates, then the no-
tion of a unitary time preference is
meaningless. Instead w e w ould need to
label time preference accord ing to the
object being d elayed -"banana time
preference," "v acation time prefer-
ence," and so on. In section 7, w e d is-
cuss in more d etail the v alid ity of the
assumption that the same rate of time
preference applies to all forms of
consumption.
3.6 C onstant Discounting and T ime
C onsistency
A ny d iscount function can be w ritten in
the formD(k)
=
H-Ik I (l,w herepn rep-
resents the per-period d iscount rate
for period n-that is, the d iscount rate
applied betw een period s n and n + 1.
Hence, by assuming that the d iscount
function takes the form D(k) = K
kI
the DU mod el assumes a constant per-
period d iscount rate
(ppn
= p for all
n).
7
C onstant d iscounting entails an ev en-
hand ed ness in the w ay a person ev alu-
ates time. It means that d elaying or
accelerating tw o d ated outcomes by a
common amount should not change
preferences betw een the outcomes-if
in period t a person prefers X at X to Y
at t + d for some t, then in period t she
must prefer X at t to Y at t + d for all t.
T he assumption of constant d iscounting
permits a person's time preference to
be summarized as a single d iscount
rate. If constant d iscounting d oes not
hold , then characterizing one's time
preference requires the specification of
an entire d iscountfunction.
C onstant d iscounting implies that a
person's intertemporal preferences are
time-consistent, w hich means that later
preferences "confirm" earlier prefer-
ences. Formally, a person's preferences
are time-consistent if, for any tw o con-
sumption profiles (C t,.. .,C T ) and (C 't,...,C 'T ),
w ith ct = c't, Ut(ct,ct + 1,.. .,C T ) ? Ut(c't,C 't+ 1,
...,C /T ) if and only if Ut+1(ct+1,...,cT )
>
Ut+l(c't+1,...,C 'T ).8
For an
interesting
d is-
cussion that questions the normativ e v a-
lid ity of constant d iscounting, see Martin
A lbrecht and Martin Weber (1995).
3.7 Diminishing Marginal Utility
and Positiv e T ime Preference
While not core features of the DU
mod el, v irtually all analyses of intertem-
poral choice assume both d iminishing
6
A s w e d iscuss in section 5, end ogenous prefer-
ence changes, d ue to things such as habit forma-
tion or reference d epend ence, are best und erstood
in terms of consumption interd epend ence and not
nonstationary utility. In some situations, nonsta-
tionarities clearly play an important role in behav -
ior-e.g., Stev en Suranov ic, R obert Gold farb, and
T homas Leonard (1999), and O'Donoghue and
Mathew R abin (1999a; 2000) d iscuss the impor-
tance of nonstationarities in the realm of ad d ictiv e
behav ior.
7
A n alternativ e but equiv alent d efinition of con-
stant d iscounting is that D(k)/D(k + 1) is ind epen-
d ent of k.
8 C onstant d iscounting implies time-consistent
preferences only und er the ancillary assumption
of stationary d iscounting, for w hich the d is-
count function D(k) is the same in all period s. A s a
counterexample, if the period -t d iscount function
is
Dt(k)
=
(,+p)
w hile the
k
period -t + 1 d iscount
function is
Dt+l(k)
= (r+E1 for some p' ? p, then
the person exhibits cons ant d iscounting at both
d ates t and t + 1, but nonetheless has time-
inconsistent preferences.
marginal utility (that the instantaneous
utility function u(ct) is concav e) and posi-
tiv e time preference (that the d iscount rate
p is positiv e).9 T hese tw o assumptions
create opposing forces in intertemporal
choice: d iminishing marginal utility mo-
tiv ates a person to spread consumption
ov er time, w hile positiv e time prefer-
ence motiv ates a person to concentrate
consumption in the present.
Since people d o, in fact, spread con-
sumption ov er time, the assumption of
d iminishing marginal utility (or some
other property that has the same effect)
seems strongly justified . T he assump-
tion of positiv e time preference, on the
other hand , is more questionable. Sev -
eral researchers hav e argued for posi-
tiv e time preference on logical ground s
(Jack Hirshleifer 1970; Koopmans 1960;
Koopmans, Peter A . Diamond , and
R ichard E. Williamson 1964; Olson and
Bailey 1981). T he gist of their argu-
ments is that a zero or negativ e time
preference, combined w ith a positiv e
real rate of return on sav ing, w ould
command the infinite d eferral of all
consumption.10 But this conclusion as-
sumes, unrealistically, that ind iv id uals
hav e infinite life-spans and linear (or
w eakly concav e) utility functions. Nev er-
theless, in econometric analyses of sav -
ings and intertemporal substitution, posi-
tiv e time preference is sometimes treated
as an id entifying restriction w hose v io-
lation is interpreted as ev id ence of
misspecification.
T he most compelling argument sup-
porting the-logic of positiv e time pref-
erence w as mad e by Derek Parfit (1971;
1976; 1982), w ho contend s that there is
no end uring self or "I" ov er time to
w hich all future utility can be ascribed ,
and that a d iminution in psychological
connections giv es our d escend ent fu-
ture selv es the status of other people-
making that utility less than fully
"ours" and giv ing us a reason to count it
less:11
We care less about our further future . . .
because w e know that less of w hat w e are
now -less, say, of our present hopes or plans,
lov es or id eals-w ill surv iv e into the further
future . . . [if] w hat matters hold s to a lesser
d egree, it cannot be irrational to care less.
(Parfit 1971, p. 99)
Parfit's claims are normativ e, not d e-
scriptiv e. He is not attempting to ex-
plain or pred ict people's intertemporal
choices, but is arguing that conclusions
about the rationality of time preference
must be ground ed in a correct v iew of
personal id entity. How ev er, if this is the
only compelling normativ e rationale for
time d iscounting, it w ould be instruc-
tiv e to test for a positiv e relation be-
tw een observ ed time d iscounting and
changing id entity. Fred erick (2002)
cond ucted the only stud y of this type,
9
Discounting is not inherent to the DU mod el,
because the mod el could be applied w ith p < 0.
How ev er, the inclusion of p in the mod el strongly
implies that it may take a v alue other than zero,
and the name d iscount rate certainly suggests that
it is greater than zero.
10
In the context of intergenerational choice,
Koopmans (1967) called this result the parad ox of
the ind efinitely postponed splurge. See also Ken-
neth J. A rrow (1983), S. C hakrav arty (1962), and
R obert M. Solow (1974).
11A s noted by Fred erick (2002), there is much
d isagreement about the nature of Parfit's claim. In
her rev iew of the philosophical literature, Jennifer
Whiting (1986, p. 549) i entifies four d ifferent in-
terpretations: (1) the strong absolute claim: that it
is irrational for someone to care about their future
w elfare, (2) the w eak absolute claim: that there is
no rational requirement to care about one's future
w elfare, (3) the strong comparativ e claim: that it is
irrational to care more about one's ow n future
w elfare than about the w elfare of any other per-
son, and (4) the w eak comparativ e claim: that one
is not rationally required to care more about their
future w elfare than about the w elfare of any other
person. We believ e that all of these interpretations
are too strong, and that Parfit end orses only a
w eaker v ersion of the w eak absolute claim. T hat is,
he claims only that one is not rationally required
to care about one's future w elfare to a d egree that
exceed s the d egree of psychological connected ness
that obtains betw een one's current self and one's
future self.
and found no relation betw een mone-
tary d iscount rates (as imputed from
proced ures such as "I w ould be ind iffer-
ent betw een $100 tomorrow and $-
in fiv e years") and self-perceiv ed stabil-
ity of id entity (as d efined by the follow -
ing similarity ratings: "C ompared to
now , how similar w ere you fiv e years
ago [w ill you be fiv e years from
now ]?"), nor d id he find any relation
betw een such monetary d iscount rates
and the presumed correlates of id entity
stability (e.g., the extent to w hich peo-
ple agree w ith the statement "I am still
embarrassed by stupid things I d id a
long time ago").
4. DU A nomalies
Ov er the last tw o d ecad es, empirical
research on intertemporal choice has
d ocumented v arious inad equacies of the
DU mod el as a d escriptiv e mod el of be-
hav ior. First, empirically observ ed d is-
count rates are not constant ov er time,
but appear to d ecline- a pattern often
referred to as hyperbolic d iscounting.
Furthermore, ev en for a giv en d elay,
d iscount rates v ary across d ifferent
types of intertemporal choices: gains
are d iscounted more than losses, small
amounts more than large amounts, and
explicit sequences of multiple outcomes
are d iscounted d ifferently than outcomes
consid ered singly.
4.1 Hyperbolic Discounting
T he best d ocumented DU anomaly
is hyperbolic d iscounting. T he term
"hyperbolic d iscounting" is often used
to mean, in our terminology, that a per-
son has a d eclining rate of time prefer-
ence (in our notation, Pn
is d eclining in
n), and w e ad opt this meaning here.
Sev eral results are usually interpreted
as ev id ence for hyperbolic d iscounting.
First, w hen subjects are asked to com-
pare a smaller-sooner rew ard to a
larger-later rew ard (see section 6 for a
d escription of these proced ures), the
implicit d iscount rate ov er longer time
horizons is low er than the implicit d is-
count rate ov er shorter time horizons.
For example, R ichard T haler (1981)
asked subjects to specify the amount of
money they w ould require in [one
month/one year/ten years] to make them
ind ifferent to receiv ing $15 now . T he
med ian responses [$20/$50/$100] imply
an av erage (annual) d iscount rate of
345 percent ov er a one-month horizon,
120 percent ov er a one-year horizon,
and 19 percent ov er a ten-year hori-
zon.12 Other researchers hav e found a
similar pattern (Uri Benzion, A mnon
R apoport, and Joseph Yagil 1989;
Gretchen B. C hapman 1996; C hapman
and A rthur S. Elstein 1995; John L.
Pend er 1996; Daniel A . R ed elmeier and
Daniel N. Heller 1993).
Second , w hen mathematical functions
are explicitly fit to such d ata, a hyper-
bolic functional form, w hich imposes
d eclining d iscount rates, fits the d ata
better than the exponential functional
form, w hich imposes constant d iscount
rates (Kris N. Kirby 1997; Kirby and Nino
Marakov ic 1995; Joel Myerson and Leon-
ard Green 1995; How ard R achlin, A nd res
R aineri, and Dav id C ross 1991).13
T hird , researchers hav e show n that
12
T hat is, $15 $20*(e-(3.45)(1/12))
=
$50*(e-(1.20)(1))
=
$100*(e-(O 19)(l0)). While most empirical stud ies re-
port av erage d iscount rates ov er a giv en horizon, it
is sometimes more useful to d iscuss av erage "per-
period " d iscount rates. Framed in these terms,
T haler's results imply an av erage (annual) d iscount
rate of 345 percent betw een now and one month
from now , 100 percent betw een one month from
now and one year from now , and 7.7 percent
betw een one year from now and ten
years
from now . T hat is, $15 = $20*(e-(3.45)(1/12)) =
$50*(e-(3.45)(1/12) e-(1.00)(11/12) = $100*(e-(3.45)(1/12)
e-(1.00)(11/12)e-(0.077)(9)).
13
Sev eral hyperbolic functional forms hav e
been proposed : George A inslie (1975) suggested
the function D(t) = lit, R ichard Herrnstein (1981)
and James Mazur (1987) suggested D(t) = 1/(1 + oct),
and George Loew enstein and Drazen Prelec (1992)
suggested D(t) = 1/(1 + oct)P/uA .
Fred erick, Loew enstein, and O'Dlonoghue: T ime Discounting 361
preferences betw een tw o d elayed re-
w ard s can rev erse in fav or of the more
proximate rew ard as the time to both
rew ard s d iminishes-e.g., someone may
prefer $110 in 31 d ays ov er $100 in 30
d ays, but also prefer $100 now ov er
$110 tomorrow . Such "preference re-
v ersals" hav e been observ ed both in
humans (Green, Nathaniel Fristoe, and
Myerson 1994; Kirby and Herrnstein
1995; A nd rew Millar and Douglas
Nav arick 1984; Jay Solnick et al. 1980)
and in pigeons (A inslie and Herrnstein
1981; Green et al. 1981).14
Fourth, the pattern of d eclining d is-
count rates suggested by the stud ies
abov e is also ev id ent across stud ies. In
section 6, w e summarize stud ies that es-
timate d iscount rates. Figure la plots
the av erage estimated d iscount factor
(= 1/(1 + d iscount rate)) from each of
these stud ies against the av erage time
horizon for that stud y.15 A s the regres-
sion line reflects, the estimated d is-
count factor increases w ith the time ho-
rizon, w hich means that the d iscount
rate d eclines. We note, how ev er, that
after exclud ing stud ies w ith v ery short
time horizons (one year or less) from
the analysis (see figure lb), there is no
ev id ence that d iscount rates continue to
d ecline. In fact, after exclud ing the stud -
ies w ith short time horizons, the corre-
lation betw een time horizon and d iscount
factor is almost exactly zero (-0.0026).
A lthough the collectiv e ev id ence out-
lined abov e seems ov erw helmingly to
support hyperbolic d iscounting, a re-
cent stud y by Daniel R ead (2001)
points out that the most common type
of ev id ence-the find ing that implicit
d iscount rates d ecrease w ith the time
horizon-could also be explained by
"subad d itiv e d iscounting," w hich means
the total amount of d iscounting ov er a
temporal interv al increases as the inter-
v al is more finely partitioned .16 T o d em-
onstrate subad d itiv e d iscounting and
d istinguish it from hyperbolic d iscount-
ing, R ead elicited d iscount rates for a tw o-
year (24-month) interv al and for its three
constituent interv als, an eight-month
interv al beginning at the same time, an
eight-month interv al beginning eight
months later, and an eight-month inter-
v al beginning sixteen months later. He
found that the av erage d iscount rate
for the 24-month interv al w as low er than
the compound ed av erage d iscount rate
ov er the three eight-month subinterv als-
a result pred icted by subad d itiv e d is-
counting but not pred icted by hyper-
bolic d iscounting (or any type of d iscount
function, for that matter). Moreov er,
there w as no ev id ence that d iscount rates
d eclined w ith time, as the d iscount
rates for the three eight-month inter-
v als w ere approximately equal. Similar
empirical results w ere found earlier by
J. H. Holcomb and P. S. Nelson (1992),
14
T hese stud ies all d emonstrate preference re-
v ersals in the synchronic sense-subjects simulta-
neously prefer $100 now ov er $110 tomorrow and
prefer $110 in 31 d ays ov er $100 in 30 d ays, w hich
is consistent w ith hyperbolic d iscounting. But
there seems to be an implicit belief that such pref-
erence rev ersals w ould also hold in the d iachronic
sense-that if subjects w ho currently prefer $110
in 31 d ays ov er $100 in 30 d ays w ere brought back
to the lab thirty d ays later, they w ould prefer $100
at that time ov er $110 one d ay later. Und er the
assumption of stationary d iscounting (as d iscussed
in footnote 8), synchronic preference rev ersals im-
ply d iachronic preference rev ersals. T o the extent
that subjects anticipate d iachronic rev ersals and
w ant to av oid them, ev id ence of a preference for
commitment could also be interpreted as ev id ence
for hyperbolic d iscounting (w e d iscuss this issue
more in section 5.1.1).
15
In some cases, the d iscount rates w ere com-
puted from the med ian respond ent. In other
cases, the mean d iscount rate w as used .
16
R ead 's proposal that d iscounting is subad d i-
tiv e is compatible w ith analogous results in other
d omains. For example, A mos T v ersky and Derek
Koehler (1994) found that the total probability as-
signed to an ev ent increases the more finely the
ev ent is partitioned -e.g., the probability of
"d eath by accid ent" is jud ged to be more likely if
one separately elicits the probability of "d eath by
fire," "d eath by d row ning," "d eath by falling," etc.
1.0
-
e 0.8
0.6
El
0.4-
$ 0.2
0.0
0 5 10 15
time horizon (years)
Figure la. Discount Factor as a Function of T ime
Horizon (all stud ies)
although they d id not interpret their
results the same w ay.
If R ead is correct about subad d itiv e
d iscounting, its main implication for
economic applications may be to prov id e
an alternativ e psychological und erpin-
ning for using a hyperbolic d iscount
function, because most intertemporal
d ecisions are based primarily on d is-
counting from the present.17
-~1.0 @0
c
0.8
- *
o 0.6-
e 0.4-
= 0.2-
*E0.0-
0 5 10 15
time horizon (years)
Figure lb. Discount Factor as a Function of T ime
Horizon (stud ies w ith av g. horizons > 1 year)
4.2 Other DU A nomalies
T he DU mod el not only d ictates that
the d iscount rate should be constant for
all time period s; it also assumes that the
d iscount rate should be the same for all
types of good s and all categories of
intertemporal d ecisions. T here are sev -
eral empirical regularities that appear to
contrad ict this assumption, namely:
(1) gains are d iscounted more than
losses; (2) small amounts are d iscounted
more than large amounts; (3) greater
d iscounting is show n to av oid d elay
of a good than to exped ite its receipt;
(4) in choices ov er sequences of
outcomes, improv ing sequences are
often preferred to d eclining sequences
though positiv e time preference d ic-
tates the opposite; and (5) in choices
ov er sequences, v iolations of ind epen-
d ence are perv asiv e, and people seem
to prefer spread ing consumption ov er
time in a w ay that d iminishing marginal
utility alone cannot explain.
4.2.1 T he "Sign Effect" (gains are
d iscounted more than losses)
Many stud ies hav e conclud ed that
gains are d iscounted at a higher rate
than losses. For instance, T haler (1981)
17A few stud ies hav e actually found increasing
d iscount rates. Fred erick (1999) asked 228 respon-
d ents to imagine that they w orked at a job that
consisted of both pleasant w ork ("good d ays") and
unpleasant w ork i"bad d ays") an to equate the
attractiv eness of hav ing ad d itional good d ays this
year or in a future year. On av erage, respond ents
w ere ind ifferent betw een 20 extra good d ays this
year, 21 the follow ing year, or 40 in fiv e years,
implying a one-year d iscount rate of 5 percent and
a fiv e-year d iscount rate of 15 percent. A possible
explanation is that a d esire for improv ement is
ev oked more strongly for tw o successiv e years
(this year and next) than for tw o separated years
(this year and fiv e years hence). R ubinstein (2000)
asked stud ents in a political science class to choose
betw een the follow ing tw o payment sequences:
March 1 June 1 Sept 1 Nov 1
A : $997 $997 $997 $997
A pril 1 Julyl Oct 1 Dec 1
B: $1000 $1000 $1000 $1000
T hen, tw o w eeks later, he asked them to choose
betw een $997 on Nov ember 1 and $1000 on
December 1. Fifty-four percent of respond ents
preferred $997 in Nov ember to $1000 in Decem-
Eer, but only 34 percent preferred sequence A to
sequence B. T hese tw o results suggest increasing
d iscount rates. T o explain them R ubinstein specu-
lated that the three more proximate ad d itional ele-
ments may hav e masked the d ifferences in the
timing of the sequence of d ated amounts, w hile
making the d ifferences in amounts more salient.
asked subjects to imagine they had re-
ceiv ed a traffic ticket that could be paid
either now or later and to state how
much they w ould be w illing to pay if
payment could be d elayed (by three
months, one year, or three years). T he
d iscount rates imputed from these an-
sw ers w ere much low er than the d iscount
rates imputed from comparable questions
about monetary gains. T his pattern is
prev alent in the literature. Ind eed , in many
stud ies, a substantial proportion of sub-
jects prefer to incur a loss immed iately
rather than d elay it (Benzion, R apoport,
and Yagil 1989; Loew enstein 1987; L. D.
MacKeigan et al. 1993; Walter Mischel,
Joan Grusec, and John C . Masters 1969;
R ed elmeier and Heller 1993; J. Frank
Yates and R oyce A . Watts 1975).
4.2.2 T he "Magnitud e Effect" (small
outcomes are d iscounted more
than large ones)
Most stud ies that v ary outcome size
hav e found that large outcomes are
d iscounted at a low er rate than small
ones (A inslie and Vard a Haend el 1983;
Benzion, R apoport, and Yagil 1989; Green,
Fristoe, and Myerson 1994; Green,
A strid Fry, and Myerson 1994; Hol-
comb and Nelson 1992; Kirby 1997;
Kirby and Marakov ic 1995; Kirby,
Nancy Petry and Warren Bickel 1999;
Loew enstein 1987; R aineri and R achlin
1993; Marjorie K. Shelley 1993; T haler
1981). In T haler's (1981) stud y, for ex-
ample, respond ents w ere, on av erage,
ind ifferent betw een $15 immed iately
and $60 in a year, $250 immed iately
and $350 in a year, and $3000 immed i-
ately and $4000 in a year, implying d is-
count rates of 139 percent, 34
percent,
and 29 percent, respectiv ely.
4.2.3 T he "Delay-Speed up" A symmetry
Loew enstein (1988) d emonstrated
that imputed d iscount rates can be
d ramatically affected by w hether the
change in d eliv ery time of an outcome
is framed as an acceleration or a d elay
from some temporal reference point.
For example, respond ents w ho d id n't
expect to receiv e a VC R for another
year w ould pay an av erage of $54 to re-
ceiv e it immed iately, but those w ho
thought they w ould receiv e it immed i-
ately d emand ed an av erage of $126 to
d elay its receipt by a year. Benzion,
R apoport, and Yagil (1989) and Shelley
(1993) replicated Loew enstein's find ings
for losses as w ell as gains (respond ents
d emand ed more to exped ite payment
than they w ould pay to d elay it).
4.2.4 Preference for Improv ing
Sequences
In stud ies of d iscounting that inv olv e
choices betw een tw o outcomes-e.g., X
at T v s. Y at T '-positiv e d iscounting is
the norm. R esearch examining prefer-
ences ov er sequences of outcomes, how -
ev er, has generally found that people
prefer improv ing sequences to d eclin-
ing sequences (for an ov erv iew , see
A riely and C armon, in press; Fred erick
and Loew enstein 2002; Loew enstein and
Prelec 1993). For example, Loew en-
stein and Nachum Sicherman (1991)
found that, for an otherw ise id entical
job, most subjects prefer an increasing
w age profile to a d eclining or flat one
(see also R obert Frank 1993). C hristo-
pher Hsee, R obert P. A belson, and
Peter Salov ey (1991) found that an in-
creasing salary sequence w as rated as
highly as a d ecreasing sequence that
conferred much more money. C arol
Varey and Kahneman (1992) found that
subjects strongly preferred streams of
d ecreasing d iscomfort to streams of in-
creasing d iscomfort, ev en w hen the ov er-
all sum of d iscomfort ov er the interv al
w as otherw ise id entical. Loew enstein
and Prelec (1993) found that respon-
d ents w ho chose betw een sequences of
tw o or more ev ents (e.g., d inners or
v acation trips) on consecutiv e w eekend s
or consecutiv e months generally pre-
ferred to sav e the better thing for last.
C hapman (2000) presented respond ents
w ith hypothetical sequences of head -
ache pain that w ere matched in terms
of total pain that either grad ually less-
ened or grad ually increased w ith time.
Sequence d urations includ ed one hour,
one d ay, one month, one year, fiv e
years, and tw enty years. For all se-
quence d urations, the v ast majority
(from 82 percent to 92 percent) of sub-
jects preferred the sequence of pain
that lessened ov er time. (See also W. T .
R oss, Jr. and I. Simonson 1991).
4.2.5 Violations of Ind epend ence
and Preferencefor Spread
T he research on preferences ov er se-
quences also rev eals strong v iolations of
ind epend ence. C onsid er the follow ing
pair of questions from Loew enstein and
Prelec (1993):
Imagine that ov er the next fiv e w eekend s you must
d ecid e how to spend your Saturd ay nights. From each
pair of sequences of d inners below , circle the one you
w ould prefer. "Fancy French" refers to a d inner at a
fancy French restaurant. "Fancy Lobster" refers to an
exquisite lobster d inner at a four-star restaurant. Ignore
sched uling consid erations (e.g., your current plans).
first second third fourth fifth
w eekend w eekend w eekend w eekend w eekend
Option A
Fancy Eat at Eat at Eat at Eat at [11%]
French home home home home
Option B
Eat at Eat at Fancy Eat at Eat at [89%]
home home French home home
Option C
Fancy Eat at Eat at Eat at Fancy [49%]
French home home home Lobster
Option D
Eat at Eat at Fancy Eat at Fancy [51%]
home home French home Lobster
A s d iscussed in section 3.3, consump-
tion ind epend ence implies that prefer-
ences betw een tw o consumption pro-
files should not be affected by the
nature of the consumption in period s in
w hich consumption is id entical in the
tw o profiles. T hus, anyone preferring
profile B to profile A (w hich share the
fifth period "Eat at Home") should also
prefer profile D to profile C (w hich
share the fifth period "Fancy Lobster").
A s the d ata rev eal, how ev er, many
respond ents v iolated this pred iction,
preferring the fancy French d inner on
the third w eekend , if that w as the only
fancy d inner in the profile, but prefer-
ring the fancy French d inner on the
first w eekend if the profile contained
another fancy d inner. T his result could
be explained by the simple d esire to
spread consumption ov er time-w hich,
in this context, v iolates the d ubious as-
sumption of ind epend ence that the DU
mod el entails.
Loew enstein and Prelec (1993) pro-
v id e further ev id ence of such a prefer-
ence for spread . Subjects w ere asked to
imagine that they w ere giv en tw o cou-
pons for fancy ($100) restaurant d in-
ners, and w ere asked to ind icate w hen
they w ould use them, ignoring consid -
erations such as holid ays, birthd ays, and
such. Subjects either w ere told that
"you can use the coupons at any time
betw een tod ay and tw o years from to-
d ay" or w ere told nothing about any
constraints. Subjects in the tw o-year
constraint cond ition actually sched uled
both d inners at a later time than those
w ho faced no explicit constraint-they
d elayed the first d inner for eight w eeks
(rather than three) and the second d in-
ner for 31 w eeks (rather than thirteen).
T his counterintuitiv e result can be ex-
plained in terms of a preference for
spread if the explicit tw o-year interv al
w as greater than the implicit time hori-
zon of subjects in the unconstrained
group.
4.3 A re T hese "A nomalies" Mistakes?
In other d omains of jud gment and
choice, many of the famous "effects"
that hav e been d ocumented are re-
gard ed as errors by the people w ho
commit them. For example, in the "con-
junction fallacy" d iscov ered by T v ersky
and Kahneman (1983), many people w ill-
w ith some reflection-recognize that a
conjunction cannot be more likely than
one of its constituents (e.g., that it can't
be more likely for Lind a to be a femi-
nist bank teller than for her to be
"just" a bank teller). In contrast, the
patterns of preferences that are re-
gard ed as "anomalies" in the context
of the DU mod el d o not necessarily v io-
late any stand ard or principle that peo-
ple believ e they should uphold . Ev en
w hen the choice pattern is pointed out
to people, they d o not regard them-
selv es as hav ing mad e a mistake (and
probably hav e not mad e one!). For
example, there is no compelling logic
that d ictates that one w ho prefers to
d elay a French d inner should also pre-
fer to d o so w hen that French d inner
w ill be closely follow ed by a lobster
d inner.
Ind eed , it is unclear w hether any of
the DU "anomalies" should be regard ed
as mistakes. Fred erick and R ead (2002)
found ev id ence that the magnitud e ef-
fect is more pronounced w hen subjects
ev aluate both "small" and "large"
amounts than w hen they ev aluate either
one. Specifically, the d ifference in the
d iscount rates betw een a small amount
($10) and a large amount ($1000) w as
larger w hen the tw o jud gments w ere
mad e in close succession than w hen
they w ere mad e separately. A nalogous
results w ere obtained for the sign ef-
fect, as the d ifferences in d iscount
rates betw een gains and losses w ere
slightly larger in a w ithin-subjects
d esign, w here respond ents ev aluated
d elayed gains and d elayed losses, than
in a betw een-subjects d esign w here
they ev aluate only gains or only losses.
Since respond ents d id not attempt to
coord inate their responses to conform
to DU's postulates w hen they ev aluated
rew ard s of d ifferent sizes, it suggests
that they consid er the d ifferent d is-
count rates to be normativ ely appropri-
ate. Similarly, ev en after Loew enstein
and Sicherman (1991) informed respon-
d ents that a d ecreasing w age profile
($27,000, $26,000, . . . $23,000) w ould
(v ia appropriate sav ing and inv esting)
permit strictly more consumption in
ev ery period than the correspond ing
increasing w age profile w ith an equiv -
alent nominal total ($23,000, $24,000,
. . . $27,000), respond ents still pre-
ferred the increasing sequence. Perhaps
they suspected that they could not
exercise the required self control to
maintain their d esired consumption
sequence, or felt a general leeriness
about the significance of a d eclining
w age, either of w hich could justify
that choice. A s these examples illus-
trate, many DU "anomalies" exist as
"anomalies" only by reference to a mod el
that w as constructed w ithout regard
to its d escriptiv e v alid ity, and w hich
has no compelling normativ e basis.
5. A lternativ e Mod els
In response to the anomalies just
enumerated , and other intertemporal-
choice phenomena that are inconsistent
w ith the DU mod el, a v ariety of alter-
nate theoretical mod els hav e been
d ev eloped . Some mod els attempt to
achiev e greater d escriptiv e realism by
relaxing the assumption of constant
d iscounting. Other mod els incorporate
ad d itional consid erations into the in-
stantaneous utility function, such as
the utility from anticipation. Still others
d epart from the DU mod el more
rad ically, by includ ing, for instance,
systematic mispred ictions of future
utility.
5.1 Mod els of Hyperbolic Discounting
In the economics literature, R . H.
Strotz (1955-56) w as the first to con-
sid er alternativ es to exponential d is-
counting, seeing "no reason w hy an
ind iv id ual should hav e such a special
d iscount function" (p. 172). Moreov er,
Strotz recognized that for any d iscount
function other than exponential, a
person w ould hav e time-inconsistent
preferences.18 He proposed tw o strate-
gies that might be employed by a per-
son w ho foresees how her preferences
w ill change ov er time: the "strategy of
precommitment" (w herein she commits
to some plan of action) and the "strat-
egy of consistent planning" (w herein
she chooses her behav ior ignoring plans
that she know s her future selv es w ill
not carry out).19 While Strotz d id not
posit any specific alternativ e functional
forms, he d id suggest that "special
attention" be giv en to the case of
d eclining d iscount rates.
Motiv ated by the ev id ence d iscussed
in section 4.1, there has been a recent
surge of interest among economists in
the implications of d eclining d iscount
rates (beginning w ith Dav id Laibson
1994, 1997). T his literature has used a
particularly simple functional form w hich
captures the essence of hyperbolic
d iscounting:
D(k)
=ib ifk;
P fk>
0.
T his functional form w as first introd uced
by E. S. Phelps and Pollak (1968) to
stud y intergenerational altruism, and w as
first applied to ind iv id ual d ecision mak-
ing by Jon Elster (1979). It assumes that
the per-period d iscount rate betw een
now and the next period is
'-
w hereas
the per-period d iscount rate betw een
any tw o future period s is lA < l P8.
Hence, this (J3,6) formulation assumes a
d eclining d iscount rate betw een this pe-
riod and next, but a constant d iscount
rate thereafter. T he (J3,6) formulation is
highly tractable, and captures many of
the qualitativ e implications of hyperbolic
d iscounting.
Laibson and his collaborators hav e
used the
(P8,6)
formulation to explore
the implications of hyperbolic d iscount-
ing for consumption-sav ing behav ior.
Hyperbolic d iscounting lead s a person
to consume more than she w ould like
from a prior perspectiv e (or, equiv a-
lently, to und er-sav e). Laibson (1997)
explores the role of illiquid assets, such
as housing, as an imperfect commit-
ment technology, emphasizing how a
person could limit ov erconsumption by
tying up her w ealth in illiquid assets.
Laibson (1998) explores consumption-
sav ing d ecisions in a w orld w ithout illiq-
uid assets (or any other commitment
technology). T hese papers d escribe how
hyperbolic d iscounting might explain
some stylized empirical facts, such as
the excess comov ement of income and
consumption, the existence of asset-spe-
cific marginal propensities to consume,
low lev els of precautionary sav ings, and
the correlation of measured lev els of
patience w ith age, income, and w ealth.
Laibson, A nd rea R epetto, and Jeremy
T obacman (1998), and George-Marios
A ngeletos et al. (2001) calibrate mod els
of consumption-sav ing d ecisions, using
both exponential d iscounting and (,3,6)
hyperbolic d iscounting. By comparing
simulated d ata to real-w orld d ata, they
d emonstrate how hyperbolic d iscount-
ing can better explain a v ariety of
empirical observ ations in the consump-
tion-sav ing literature. In particular,
18
Strotz implicitly assumes stationary d iscount-
ing.
19
Build ing on Strotz's strategy of consistent
planning, some researchers hav e ad d ressed the
question of w hether there exists a consistent path
or general non-exponential d iscount functions.
See in particular R obert Pollak (1968), Bezalel
Peleg and Menahem Yaari (1973), and Stev en
Gold man (1980).
A ngeletos et al. (2001) d escribe how
hyperbolic d iscounting can explain
the coexistence of high preretirement
w ealth, low liquid asset hold ings (rela-
tiv e to income lev els and illiquid asset
hold ings), and high cred it-card d ebt.
C arolyn Fischer (1999) and
O'Donoghue and R abin (1999c, 2001)
hav e applied (,3,6) preferences to pro-
crastination, w here hyperbolic d iscount-
ing lead s a person to put off an onerous
activ ity more than she w ould like from a
prior perspectiv e.20 O'Donoghue and
R abin (1999c) examine the implications
of hyperbolic d iscounting for contract-
ing w hen a principal is concerned w ith
combating procrastination by an agent.
T hey show how incentiv e schemes w ith
"d ead lines" may be a useful screening
d ev ice to d istinguish efficient d elay from
inefficient procrastination. O'Donoghue
and R abin (2001) explore procrastina-
tion w hen a person must not only
choose w hen to complete a task, but
also w hich task to complete. T hey show
that a person might nev er carry out a
v ery easy and v ery good option because
they continually plan to carry out an
ev en better but more onerous option.
For instance, a person might nev er take
half an hour to straighten the shelv es in
her garage because she persistently
plans to take an entire d ay to d o a major
cleanup of the entire garage. Extend ing
this logic, they show that prov id ing peo-
ple w ith new options might make pro-
crastination more likely. If the person's
only option w ere to straighten the
shelv es, she might d o it in a timely
manner; but if the person can either
straighten the shelv es or d o the major
cleanup, she now may d o nothing.
O'Donoghue and R abin (1999d ) apply
this logic to retirement planning.
O'Donoghue and R abin (1999a,
2000), Jonathan Gruber and Botond
Koszegi (2000), and Juan D. C arrillo
(1999) hav e applied (J3,6) preferences
to ad d iction. T hese researchers d e-
scribe how hyperbolic d iscounting can
lead people to ov erconsume harmful
ad d ictiv e prod ucts, and examine the
d egree of harm caused by such ov er-
consumption. C arrillo and T homas
Mariotti (2000) and R oland Benabou
and Jean T irole (2000) hav e examined
how (13,6) preferences might influence a
person's d ecision to acquire informa-
tion. If, for example, a person is d ecid -
ing w hether to embark on a specific
research agend a, she may hav e the op-
tion to get feed back from colleagues
about its likely fruitfulness. T he stan-
d ard economic mod el implies that peo-
ple should alw ays choose to acquire this
information if it is free. How ev er, C ar-
rillo and Mariotti show that hyperbolic
d iscounting can lead to "strategic igno-
rance"-a person w ith hyperbolic d is-
counting w ho is w orried about w ith-
d raw ing from an ad v antageous course of
action w hen the costs become imminent
might choose not to acquire free infor-
mation if d oing so increases the risk of
bailing out.
5.1. 1 Self A w areness
A person w ith time-inconsistent pref-
erences may or may not be aw are that
her preferences w ill change ov er time.
Strotz (1955-56) and Pollak (1968)
d iscussed tw o extreme alternativ es. A t
one extreme, a person could be com-
pletely "naYv e" and believ e that her
future preferences w ill be id entical
to her current preferences. A t the
other extreme, a person could be com-
pletely "sophisticated " and correctly
pred ict how her preferences w ill
change ov er time. While casual observ a-
tion and introspection suggest that
20
While not framed in terms of hyperbolic d is-
counting, George A kerlof's (1991) mod el of pro-
crastination is formally equiv alent to a hyperbolic
mod el.
368 Journal
of
Economic
Literature,
Vol. XL
(June
2002)
people lie somew here in betw een these
tw o extremes, behav ioral ev id ence re-
gard ing the d egree of aw areness is
quite limited .
One w ay to id entify sophistication is
to look for ev id ence of commitment.
Someone w ho suspects that her prefer-
ences w ill change ov er time might take
steps to eliminate an option that seems
inferior now but might tempt her later.
For example, someone w ho currently
prefers $110 in 31 d ays to $100 in 30
d ays but w ho suspects that in a month
she w ill prefer $100 immed iately to
$110 tomorrow , might attempt to elimi-
nate the $100 rew ard from the later
choice set, and thereby bind herself
now to receiv e the $110 rew ard in 31
d ays. R eal-w orld examples of commit-
ment includ e "C hristmas clubs" or "fat
farms."
Perhaps the best empirical d emon-
stration of a preference for commit-
ment w as cond ucted by Dan A riely and
Klaus Wertenbroch (2002). In that
stud y, MIT executiv e-ed ucation stud -
ents had to w rite three short papers
for a class and w ere assigned to one
of tw o experimental cond itions. In one
cond ition, d ead lines for the three pa-
pers w ere imposed by the instructor
and w ere ev enly spaced across the se-
mester. In the other cond ition, each
stud ent w as allow ed to set her ow n
d ead lines for each of the three papers.
In both cond itions, the penalty for
d elay w as 1 percent per d ay late, re-
gard less of w hether the d ead line w as
externally or self-imposed . A lthough
stud ents in the free-choice cond ition
could hav e mad e all three papers d ue at
the end of the semester, many d id , in
fact, choose to impose d ead lines on
themselv es, suggesting that they ap-
preciated the v alue of commitment.
Few stud ents chose ev enly spaced
d ead lines, how ev er, and those w ho
d id not performed w orse in the course
than those w ith ev enly spaced d ead -
lines (w hether externally imposed or
self-imposed ) 21
O'Donoghue and R abin (1999b) ex-
amine how people's behav iors d epend
on their sophistication about their ow n
time inconsistency. Some behav iors, such
as using illiquid assets for commit-
ment, require some d egree of sophisti-
cation. Other behav iors, such as ov er-
consumption or procrastination, are
more robust to the d egree of aw are-
ness, though the d egree of misbehav ior
may d epend on the d egree of sophisti-
cation. T o und erstand such effects,
O'Donoghue and R abin (2001) intro-
d uce a formal mod el of partial naiv ete',
in w hich a person is aw are that she w ill
hav e future self-control problems but
und erestimates their magnitud e. T hey
show that sev ere procrastination cannot
occur und er complete sophistication,
but can arise ev en if the person is only
a little naiv e. For more d iscussion on
self-aw areness, see O'Donoghue and
R abin (in press).
T he d egree of sophistication v ersus
naiv ete has important implications for
public policy. If people are sufficiently
sophisticated about their ow n self-
control problems, prov id ing commit-
ment d ev ices may be beneficial. How -
ev er, if people are nafv e, policies
might be better aimed at either ed u-
cating people about loss of control
(making them more sophisticated ), or
prov id ing incentiv es for people to
use commitment d ev ices, ev en if
they d on't recognize the need for
them.
21
A similar "natural" experiment w as recently
cond ucted by the Economic and Social R esearch
C ouncil of Great Britain. T hey recently eliminated
submission d ead lines and now accept grant pro-
posals on a "rolling" basis (though they are still
rev iew ed only period ically). In response to this
policy change, submissions hav e actually d eclined
by about 15-20 percent (d irect correspond ence
w ith C hris C asw ill at ESR C ).
5.2 Mod els T hat Enrich the
Instantaneous Utility Function
Many d iscounting anomalies, espe-
cially those in section 4.2, can be un-
d erstood as a misspecification of the
instantaneous utility function. Similarly,
many of the confound s w e d iscuss in
section 6 are caused by researchers at-
tributing to the d iscount rate aspects of
preference that are more appropriately
consid ered as arguments in the instan-
taneous utility function. A s a result,
alternativ e mod els of intertemporal
choice hav e been ad v anced that ad d ad -
d itional arguments, such as utility from
anticipation, to the instantaneous utility
function.
5.2.1 Habit-Formation Mod els
James Duesenberry (1952) w as the
first economist to propose the id ea of
"habit formation"-that the utility from
current consumption ("tastes") can be
affected by the lev el of past consump-
tion. T his id ea w as more formally d ev el-
oped by Pollak (1970) and Harl R yd er
and Geoffrey Heal (1973). In habit for-
mation mod els, the period -T instantane-
ous utility function takes the form
u(C t;C t -
1,C u
- 2,...) w here a2u/ac,
act '> 0
for T ' <T . For simplicity, most such
mod els assume that all effects of past
consumption for current utility enter
through a state v ariable. T hat is, they
assume that period -T instantaneous util-
ity function takes the form u(cr;zt)
w here zt is a state v ariable that is in-
creasing in past consumption and
D2/aC C DZt > 0. Both Pollak (1970) and
R yd er and Heal (1973) assume that zt is
the exponentially w eighted sum of past
consumption, or zt = =ici
A lthough habit formation is often
said to ind uce a preference for an in-
creasing consumption profile, it can,
und er some circumstances, lead a per-
son to prefer a d ecreasing or ev en non-
monotonic consumption profile. T he d i-
rection of the effect d epend s on things
such as how much one has alread y con-
sumed (as reflected in the initial habit
stock), and , perhaps most importantly,
w hether current consumption increases
or d ecreases future utility.
In recent years, habit-formation mod -
els hav e been used to analyze a v ariety
of phenomena. Gary Becker and Kev in
Murphy (1988) use a habit-formation
mod el to stud y ad d ictiv e activ ities, and
in particular to examine the effects of
past and future prices on the current
consumption of ad d ictiv e prod ucts.22
Habit formation can help explain asset-
pricing anomalies such as the equity-
premium puzzle (A nd rew A bel 1990; John
C ampbell and John C ochrane 1999;
George M. C onstantinid es 1990). Incor-
porating habit formation into business-
cycle mod els can improv e their ability
to explain mov ements in asset prices
(Urban Jermann 1998; Michele Bold rin,
Law rence C hristiano, and Jonas Fisher
2001). Some recent papers hav e show n
that habit formation may help explain
other empirical puzzles in macro-
economics as w ell. Whereas stand ard
grow th mod els assume that high sav ing
rates cause high grow th, recent ev i-
d ence suggests that the causality can
run in the opposite d irection. C hristo-
pher C arroll, Jod y Ov erland , and Dav id
Weil (2000) show that, und er cond itions
of habit formation, high grow th rates
can cause people to sav e more. Jeffrey
Fuhrer (2000) show s how habit forma-
tion might explain the recent find ing
that aggregate spend ing tend s to hav e a
grad ual "hump-shaped " response to
22
For rational-choice mod els build ing on
Becker and Murphy's framew ork, see A thanasios
Orphanid es and Dav id Zerv os (1995), R uqu Wang
(1997), and Suranov ic, Gold farb, and Leonard
(1999). For ad d iction mod els that incorporate
hyperbolic d iscounting, see O'Donoghue and
R abin (1999a, 2000), Gruber and Koszegi (2000),
and C arrillo (1999).
v arious shocks. T he key feature of habit
formation that d riv es many of these re-
sults is that, after a shock, consumption
ad justment is sluggish in the short term
but not in the long term.
5.2.2 R eference-Point Mod els
C losely related to, but conceptually
d istinct from, habit-formation mod els
are mod els of reference-d epend ent util-
ity, w hich incorporate id eas from pros-
pect thI eory (Kahneman and T v ersky
1979; T v ersky and Kahneman 1991).
A ccord ing to prospect theory, outcomes
are ev aluated using a v alue function d e-
fined ov er d epartures from a reference
point-in our notation, the period -t in-
stantaneous utility function takes the
form u(ct,rt) = v (ct - rt). T he reference
point, rt, might d epend on past con-
sumption, expectations, social compari-
son, status quo, and such. A second
feature of prospect theory is that the
v alue function exhibits loss av ersion-
negativ e d epartures from one's refer-
ence consumption lev el d ecrease utility
by a greater amount than positiv e d e-
partures increase it. A third feature of
prospect theory is that the v alue func-
tion exhibits-d iminishing sensitiv ity for
both gains and losses, w hich means that
the v alue function is concav e ov er gains
and conv ex ov er losses.23
Loew enstein and Prelec (1992) ap-
plied a specialized v ersion of such a
v alue function to intertemporal choice
to explain the magnitud e effect, the
sign effect, and the d elay-speed up
asymmetry. T hey show that if the elas-
ticity of the v alue function is increasing
in the magnitud e of outcomes, people
w ill d iscount smaller magnitud es more
than larger magnitud es. Intuitiv ely, the
elasticity cond ition captures the insight
that people are responsiv e to both d if-
ferences and ratios of rew ard amounts.
It implies that someone w ho is ind iffer-
ent betw een, say, $10 now and $20 in a
year should prefer $200 in a year ov er
$100 now because the larger rew ard s
hav e a greater d ifference (and the same
ratio). C onsequently, ev en if a person's
time preference is actually constant
across outcomes, she w ill be more w ill-
ing to w ait for a fixed proportional in-
crement w hen rew ard s are larger, and ,
thus, her imputed d iscount rate w ill be
smaller for larger outcomes. Similarly,
if the v alue function for losses is more
elastic than the v alue function for gains,
then people w ill d iscount gains more
than losses. Finally, such a mod el helps
explain the d elay-speed up asymmetry
(Loew enstein 1988). Shifting consump-
tion in any d irection is mad e less d esir-
able by loss av ersion, since one loses
consumption in one period and gains it
in another. When d elaying consump-
tion, loss av ersion reinforces time d is-
counting, creating a pow erful av ersion
to d elay. When exped iting consumption,
loss av ersion opposes time d iscounting,
red ucing the d esirability of speed up
(and , occasionally, ev en causing an
av ersion to it).
Using a reference-d epend ent mod el
that assumes loss av ersion in consump-
tion, Dav id Bow man, Deborah Mine-
hart, and R abin (1999) pred ict that
"new s" about one's (stochastic) future
income affects one's consumption
grow th d ifferently than the stand ard
Permanent Income Hypothesis pred icts.
A ccord ing to (the log-linear v ersion of)
the Permanent Income Hypothesis,
changes in future income should not
23
R eference-point mod els sometimes assume
there is a d irect effect of the consumption lev el or
reference lev el, so that
u(c,,r,)
= v (cT - r-) +
w (c.)
or
u(cT ,rt)
= v (cT - r-) +
w (r.).
Some habit-formation
mod els could be interpreted as reference-point
mod els, w here the state v ariable zt is the refer-
ence point. Ind eed , many habit-formation mod els,
such as Pollak (1970) and C onstantinid es (1990),
assume instantaneous utility functions of the form
u(cC
- z.), although they typically assume neither
loss av ersion nor d iminishing sensitiv ity.
affect the rate of consumption grow th.
For example, if a person find s out that
her permanent income w ill be low er
than she formerly thought, she w ould
red uce her consumption by, say, 10 per-
cent in ev ery period , leav ing her con-
sumption grow th unchanged . If, how -
ev er, this person w ere loss av erse in
current consumption, she w ould be un-
w illing to red uce this year's consump-
tion by 10 percent-forcing her to re-
d uce future consumption by more than
10 percent, and thereby red ucing the
grow th rate of her consumption. T w o
stud ies by John Shea (1995a,b) support
this pred iction. Using both aggregate
U.S. d ata and d ata from teachers'
unions (in w hich w ages are set one year
in ad v ance), Shea find s that consump-
tion grow th respond s more strongly to
future w age d ecreases than to future
w age increases.
5.2.3 Mod els Incorporating Utility
from A nticipation
Some alternativ e mod els build on the
notion of "anticipal" utility d iscussed by
the eld er and younger Jev ons. If people
d eriv e pleasure not only from current
consumption, but also from anticipating
future consumption, then current in-
stantaneous utility w ill d epend posi-
tiv ely on future consumption-that is,
the period -t instantaneous utility func-
tion w ould take the form u(ct;ct + 1,
C t+2,...) w here au/ac, >o for '>t.
Loew enstein (1987) ad v anced a formal
mod el w hich assumes that a person's in-
stantaneous utility is equal to the utility
from consumption in that period plus
some function of the d iscounted utility
of consumption in future period s. Spe-
cifically, if w e let v (c) d enote utility
from actual consumption, and ' assume
this is the same for all period s, then:
U(C r;C r + 1,C r + 2,. . )
=
V(C ) +
C [yV(C + 1)
+ y2v (c+2) + ...]for somey<1.
Loew enstein d escribes how utility
from anticipation may play a role in
many DU anomalies. Because near-term
consumption d eliv ers only consumption
utility w hereas future consumption d e-
liv ers both consumption utility and an-
ticipatory utility, anticipatory utility
prov id es a reason to prefer improv e-
ment and for getting unpleasant out-
comes ov er w ith quickly instead of
d elaying them as d iscounting w ould
pred ict. It prov id es a possible explana-
tion for w hy people d iscount d ifferent
good s at d ifferent rates, because utility
from anticipation creates a d ow nw ard bias
on estimated d iscount rates, and this d ow n-
w ard bias is larger for good s that create
more anticipatory utility. If, for instance,
d read ing future bad outcomes is a
stronger emotion than sav oring future
good outcomes, w hich seems highly
plausible, then utility from anticipation
w ould generate a sign effect.24
Finally, anticipatory utility giv es rise
to a form of time inconsistency that is
quite d ifferent from that w hich arises
from hyperbolic d iscounting. Instead of
planning to d o the farsighted thing
(e.g., sav e money) but subsequently d o-
ing the shortsighted thing (splurging),
anticipatory utility can cause people to
repeated ly plan to consume a good after
some d elay that permits pleasurable
anticipation, but then to d elay again
for the same reason w hen the planned
moment of consumption arriv es.
Loew enstein's mod el of anticipatory
utility applies to d eterministic out-
comes. In a recent paper, C aplin and
Leahy (2001) point out that many an-
ticipatory emotions, such as anxiety or
24Waiting for und esirable outcomes is almost
alw ays unpreasant, but w aiting for d esirable out-
comes is sometimes pleasurale and sometimes
frustrating. Despite the manifest importance for
intertemporal choice of these emotions associated
w ith w aiting, w e are aw are of no research that has
sought to und erstand w hen w aiting for d esirable
outcomes is pleasurable or av ersiv e.
suspense, are d riv en by uncertainty
about the future, and they propose a
new mod el that mod ifies expected -
utility theory to incorporate such antici-
patory emotions. T hey then show that
incorporating anxiety into asset-pricing
mod els may help explain the equity pre-
mium puzzle and the risk-free rate puz-
zle, because anxiety creates a taste for
risk-free assets and an av ersion to risky
assets. Like Loew enstein, C aplin and
Leahy emphasize how anticipatory util-
ity can lead to time inconsistency.
Koszegi (2001) also d iscusses some
implications of anticipatory utility.
5.2.4 Visceral
Influences
A final alternativ e mod el of the utility
function incorporates "v isceral" influ-
ences such as hunger, sexual d esire,
physical pain, crav ings, and such.
Loew enstein (1996, 2000b) argues that
economics should take more seriously
the implications' of such transient
fluctuations in tastes. Formally, v isceral
influences mean that the person's
instantaneous utility function takes
the form u(cr,d l)
w here d r represents
the v ector of v isceral states in period t.
Visceral states are (at least to some
extent) end ogenous-e.g., a person's
current hunger d epend s on how much
she has consumed in prev ious period s-
and therefore lead to consumption
interd epend ence.
Visceral influences hav e important
implications for intertemporal choice
because, by increasing the attractiv e-
ness of certain good s or activ ities, they
can giv e rise to behav iors that look ex-
tremely impatient or ev en impulsiv e.
Ind eed , for ev ery v isceral influence, it
is easy to think of one or more associ-
ated problems of self-control-hunger
and d ieting, sexual d esire and v arious
"heat-of-the-moment" behav iors, crav -
ing and d rug ad d iction, and so on. Vis-
ceral influences prov id e an alternate
account of the preference rev ersals that
are typically attributed to hyperbolic
time d iscounting, because the temporal
proximity of a rew ard is one of the
cues that can activ ate appetitiv e v isceral
states (see Laibson 2001; Loew enstein
1996). Other cues-such as spatial prox-
imity, the presence of associated smells
or sound s, or similarity in current set-
ting to historical consumption sites-
may also hav e such an effect. T hus,
research on v arious types of cues may
help to generate new pred ictions about
the specific circumstances (other than
temporal proximity) that can trigger
myopic behav ior.
T he fact that v isceral states are
end ogenous introd uces issues of
state-management (as d iscussed by
Loew enstein 1999, and Laibson 2001
und er the rubric of "cue management").
While the mod el (at least the rational
v ersion of it) pred icts that a person
w ould w ant herself to use d rugs if she
w ere to experience a sufficiently strong
crav ing, it also pred icts that she might
w ant to prev ent ev er experiencing
such a strong crav ing. Hence, v isceral
influences can giv e rise to a preference
for commitment in the sense that the
person may w ant to av oid certain
situations.
Visceral influences may d o more than
merely change the instantaneous utility
function. First, there is ev id ence that
people d on't fully appreciate the effects
of v isceral influences, and hence may
not react optimally to them (Loew en-
stein 1996, 1999, 2000b). When in a hot
state, people tend to exaggerate how
long the hot state w ill persist, and , w hen
in a cold state, people tend to und eresti-
mate how much future v isceral influ-
ences w ill affect their future behav ior.
Second , and perhaps more importantly,
people often w ould "prefer" not to re-
spond to an intense v isceral factor such
as rage, fear, or lust, ev en at the
moment they are succumbing to its in-
fluence. A w ay to und erstand such ef-
fects is to apply the d istinction pro-
posed by Kahneman (1994) betw een
"experienced utility," w hich reflects
one's w elfare, and "d ecision utility,"
w hich reflects the attractiv eness of op-
tions as inferred from one's d ecisions.
By increasing the d ecision utility of cer-
tain types of actions more than the
experienced utility of those actions, v is-
ceral factors may d riv e a w ed ge be-
tw een w hat people d o and w hat makes
them happy. Douglas Bernheim and
A ntonio R angel (2001) propose a mod el
of ad d iction framed in these terms.
5.3 More "Extreme" A lternativ e
Perspectiv es
T he alternativ e mod els d iscussed
abov e mod ify the DU mod el by altering
the d iscount function or ad d ing ad d i-
tional arguments to the instantaneous
utility function. T he alternativ es d is-
cussed next inv olv e more rad ical
d epartures from the DU mod el.
5.3.1 Projection Bias
In many of the alternativ e mod els of
utility d iscussed abov e, the person's
utility from consumption-her tastes-
change ov er time. T o properly make in-
tertemporal d ecisions, a person must
correctly pred ict how her tastes w ill
change. Essentially all economic mod els
of changing tastes assume (as econo-
mists typically d o) that such pred ictions
are correct-that people hav e "rational
expectations." How ev er, Loew enstein,
O'Donoghue, and R abin (2000) propose
that, w hile people may anticipate the
qualitativ e nature of their changing
preferences, they tend to und erestimate
the magnitud e of these changes-a
systematic mispred iction they label
projection bias.
Loew enstein, O'Donoghue, and R abin
rev iew a broad array of ev id ence that
d emonstrates the prev alence of projec-
tion bias, and then mod el it formally.
T o illustrate their mod el, consid er pro-
jection bias in the realm of habit forma-
tion. A s d iscussed abov e, suppose the
period -t instantaneous utility function
takes the form u(ct;zt), w here zt is a state
v ariable that captures the effects of past
consumption. Projection bias arises w hen
a person w hose current state is zt must
pred ict her future utility giv en future
state zt. Projection bias implies that the
person's pred iction U(c;z,
I
Zt) w ill lie
betw een her true future utility u(ct;zt)
and her utility giv en her current state
u(ct;zt). A particularly simple functional
form is
Ui(cr;zr I
Zt) = (1 -
Oc)u(cr;z)
+ fcu (C tZt)
for some cc E [0,1].
Projection bias may arise w henev er
tastes change ov er time, w hether
through habit formation, changing ref-
erence points, or changes in v isceral
states. It can hav e important behav ioral
and w elfare implications. For instance,
people may und erappreciate the d egree
to w hich a present consumption splurge
w ill raise their reference consumption
lev el, and thereby d ecrease their enjoy-
ment of more mod est consumption lev -
els in the future. When intertemporal
choices are influenced by projection bias,
estimates of time preference may be
d istorted .
5.3.2 Mental-A ccounting Mod els
Some researchers hav e proposed that
people d o not treat all money as fungi-
ble, but instead assign d ifferent types of
expend itures to d ifferent "mental ac-
counts" (see T haler 1999 for a recent
ov erv iew ). Such mod els can giv e rise to
intertemporal behav iors that seem od d
w hen v iew ed through the lens of the
DU mod el. T haler (1985), for instance,
suggests that small amounts of money
are cod ed as spend ing money, w hereas
larger amounts of money are cod ed
as sav ings, and that a person is more
w illing to spend out of the former ac-
count. T his accounting rule w ould pre-
d ict that people w ill behav e like spend -
thrifts for small purchases (e.g., a new
pair of shoes), but act more frugally
w hen it comes to large purchases (e.g.,
a new d ining-room table).25 Shlomo
Benartzi and T haler (1995) suggest that
people treat their financial portfolios as
a mental account, and emphasize the
importance of how often people "ev alu-
ate" this account. T hey argue that if
people rev iew their portfolios once a
year or so, and if people experience joy
or pain from any gains or losses, as as-
sumed in Kahneman and T v ersky's
(1979) prospect theory, then such "my-
opic loss av ersion" represents a plausi-
ble explanation for the equity premium
puzzle.
Prelec and Loew enstein (1998) pro-
pose another w ay in w hich mental ac-
counting might influence intertemporal
choice. T hey posit that payments for
consumption confer immed iate d isutil-
ity or "pain of paying," and that people
keep mental accounts that link the con-
sumption of a particular item w ith the
payments for it. T hey also assume that
people engage in "prospectiv e account-
ing." A ccord ing to prospectiv e account-
ing, w hen consuming, people think only
about current and future payments; past
payments d on't cause pain of paying.
Likew ise, w hen paying, the pain of pay-
ing is buffered only by thoughts of
future, but not past, consumption. T he
mod el suggests that d ifferent w ays of fi-
nancing a purchase can lead to d ifferent
d ecisions, ev en hold ing the net present
v alue of payments constant. Similarly, a
person might hav e d ifferent financing
preferences d epend ing on the con-
sumption item (e.g., they should prefer
to prepay for a v acation that is con-
sumed all at once v s. a new car that is
consumed ov er many years). T he mod el
generates a strong preference for pre-
payment (except for d urables), for get-
ting paid after rather than before d oing
w ork, and for fixed -fee pricing schemes
w ith zero marginal costs ov er pay-as-
you-go schemes that tightly couple mar-
ginal payments to marginal consumption.
T he mod el also suggests that interind i-
v id ual heterogeneity might arise from
d ifferences in the d egree to w hich peo-
ple experience the pain of paying rather
than d ifferences in time preference. On
this v iew , the miser w ho eschew s a
fancy restaurant d inner is not d oing so
because she explicitly consid ers the
d elayed costs of the ind ulgence, but
rather because her enjoyment of the
d inner w ould be d iminished by the
immed iate pain of paying for it.
5.3.3 C hoice Bracketing
One important aspect of mental ac-
counting is that a person makes at most
a few choices at any one time, and gen-
erally ignores the relation betw een
these choices and other past and future
choices. Which choices are consid ered
at the same time is a matter of w hat
R ead , Loew enstein, and R abin (1999)
label "choice bracketing." Intertempo-
ral choices, like other choices, can be
influenced by the manner in w hich they
are bracketed , because d ifferent brack-
eting can highlight d ifferent motiv es.
T o illustrate, consid er the conflict be-
tw een impatience and a preference for
improv ement ov er time. Loew enstein
and Prelec (1993) d emonstrate that the
relativ e importance of these tw o mo-
tiv es can be altered by the w ay that
25
While it seems possible that this conceptual-
ization could explain the magnitud e effect as w ell,
the magnitud e effect is found for v ery "small"
amounts (e.g., betw een $2 and $20 in A inslie and
Haend el 1983), and for v ery "large amounts" (e.g.,
betw een, $10,000 and $1,000,000 in R aineri and
R achlin 1993). It seems highly unlikely that re-
spond ents w ould consistently cod e the low er
amounts as spend ing and the higher amounts as
sav ings across all of these stud ies.
choices are bracketed . T hey asked one
group of subjects to choose betw een
hav ing d inner at a fine French restau-
rant in one month v s. tw o months. Most
subjects chose one month, presumably
reflecting impatience. T hey then asked
another group to choose betw een eating
at home in one month follow ed by eating
at the French restaurant in tw o months
v s. eating at the French restaurant in one
month follow ed by eating at home in tw o
months. T he majority now w anted the
French d inner in tw o months. For both
groups, d inner at home w as the most
likely alternativ e to the French d inner,
but it w as only w hen the tw o d inners
w ere expressed as a sequence that the
preference for improv ement became a
basis for d ecision.
A nalyzing how people frame or
bracket choices may help illuminate the
issue of w hether a preference for im-
prov ement merely reflects the com-
bined effect of other motiv es, such as
reference d epend ence ror anticipatory
utility, or w hether it is something
unique. View ed from an integrated
d ecision-making perspectiv e, it perhaps
seems natural to conclud e that the pref-
erence for improv ement is d eriv ativ e of
these other concepts, because it is not
clear w hy improv ement for its ow n sake
should be v aluable. But w hen v iew ed
from a choice-bracketing perspectiv e,
w herein a person must hav e some choice
heuristic for ev aluating sequences, it
seems possible that improv ement may
be v alued for its ow n sake. Specifically,
a preference-for-improv ement choice
heuristic may hav e originated from con-
sid erations of reference d epend ence or
anticipatory utility, but a person using
this choice heuristic may come to feel
that improv ement for its ow n sake has
v alue.26
Loew enstein and Prelec (1993) d e-
v elop a (choice-heuristic) mod el for how
people ev aluate choices ov er sequences.
T hey assume that people consid er a
sequence's d iscounted utility, its d egree
of improv ement, and its d egree of
spread . T he key ingred ients of the
mod el are "gestalt" d efinitions for im-
prov ement and spread . In other w ord s,
they d ev elop a formal measure of the
d egree of improv ement and the d egree
of spread for any sequence. T hey show
that their mod el can explain a w id e
range of sequence anomalies, includ ing
observ ed v iolations of ind epend ence,
and that it pred icts preferences be-
tw een sequences much better than
other mod els that incorporate similar
numbers of free parameters (ev en a
mod el w ith an entirely flexible time
d iscount function).
5.3.4 Multiple-Self Mod els
A n influential school of theorists hav e
proposed mod els that v iew intertempo-
ral choice as the outcome of a conflict
betw een multiple selv es. Most multiple-
self mod els postulate myopic selv es w ho
are in conflict w ith more farsighted
ones, and often d raw analogies betw een
intertemporal choice and a v ariety of
d ifferent mod els of interpersonal strate-
gic interactions. Some mod els (e.g.,
A inslie and Nick Haslam 1992; T homas
26T hus, to the extent that the preference for
improv ement reflects a choice heuristic, it should
be susceptible to framing or bracketing effects,
because w hat constitutes a sequence is highly sub-
jectiv e, as noted by Loew enstein and Prelec 1993
and by John G. Beebe-C enter (1929) sev eral d e-
cad es earlier:
What enables one to d ecid e w hether a giv en
set of affectiv e experiences d oes, or d oes not,
constitute a unitary temporal group? .
w hat of series inv olv ing experiences of d iffer-
ent mod alities- v isual and aud itory ex-
periences, for instance? . . . A nd w hat of
such complex ev ents as "arising in the morn-
ing" or "eating a good meal" or "enjoying a
good book?" (Beebe-C enter 1929, p. 67,
emphasis ad d ed )
C . Schelling 1984; Gord on C . Winston
1980) assume that there are tw o agents,
one myopic and one farsighted , w ho al-
ternately take control of behav ior. T he
main problem w ith this approach is that
it fails to specify w hy either type of
agent emerges w hen it d oes. Further-
more, by characterizing the interaction
as a battle betw een the tw o agents,
these mod els fail to capture an impor-
tant asymmetry: farsighted selv es often
attempt to control the behav iors of my-
opic selv es, but nev er the rev erse. For
instance, the farsighted self may pour
v od ka d ow n the d rain to prev ent to-
morrow 's self from d rinking it, but the
myopic self rarely takes steps to ensure
that tomorrow 's self w ill hav e access to
the alcohol he w ill then crav e.
R espond ing, in part, to this problem,
T haler and Hersh Shefrin (1981) pro-
posed a "planner-d oer" mod el that
d raw s upon principal-agent theory. In
their mod el, a series of myopic "d oers,"
w ho care only about their ow n immed i-
ate gratification (and hav e no affinity
for future or past d oers), interact w ith a
unitary "planner" w ho cares equally
about the present and future. T he
mod el focuses on the strategies em-
ployed by the planner to control the
behav ior of the d oers. T he mod el high-
lights the observ ation, later d iscussed at
length by Loew enstein (1996), that the
farsighted perspectiv e is often much
more constant than the myopic perspec-
tiv e. For example, people are often con-
sistent in recognizing the need to main-
tain a d iet. Yet they period ically v iolate
their ow n d esired course of action-
often recognizing ev en at the moment
of d oing so that they are not behav ing
in their ow n self-interest.
Yet a third type of multiple-self
mod el d raw s connections betw een inter-
temporal choice and mod els of multi-
person strategic interactions (Elster
1985). T he essential insight that these
mod els capture is that, much like coop-
eration in a social d ilemma, self-control
often requires the cooperation of a se-
ries of temporally situated selv es. When
one self "d efects" by opting for immed i-
ate gratification, the consequence can
be a kind of unrav eling or "falling off
the w agon" w hen subsequent selv es
follow the preced ent.
Few of these multiple-self mod els
hav e been expressed formally, and ev en
few er hav e been used to d eriv e testable
implications that go much beyond the
intuitions that inspired them in the first
place. How ev er, perhaps it is unfair to
criticize the mod els for these short-
comings. T hese mod els are probably best
v iew ed as metaphors intend ed to high-
light specific aspects of intertemporal
choice. Specifically, multiple-self mod -
els hav e been used to make sense of
the w id e range of self-control strategies
that people use to regulate their ow n
future behav ior. Moreov er, these mod -
els prov id ed much of the inspiration for
more recent formal mod els of sophisti-
cated hyperbolic d iscounting (follow ing
Laibson 1994, 1997).
5.3.5 T emptation Utility
Most mod els of intertemporal choice-
ind eed , most mod els of choice in any
framew ork-assume that options not
chosen are irrelev ant to a person's w ell-
being. In a recent paper, Gul and
Pesend orfer (2001) posit that people
hav e "temptation preferences," w herein
they experience d isutility from not
choosing the option that is most enjoy-
able now . T heir theory implies that a
person might be better off if some
particularly tempting option w ere not
av ailable, ev en if she d oesn't choose
that option. A s a result, she may be w ill-
ing to pay in ad v ance to eliminate that
option, or in other w ord s, she may hav e
a preference for commitment.
5.3.6 C onclusion: C ombining Insights
from Different Mod els
Many behav ioral mod els of intertem-
poral choice focus on a single mod ifica-
tion to the DU mod el and explore the
ad d itional realism prod uced by that
single mod ification. But many empirical
phenomena reflect the interaction of
multiple phenomena. For instance, a
preference for improv ement may inter-
act w ith hyperbolic d iscounting to pro-
d uce preferences for U-shaped sequences-
e.g., for jobs that offer a signing bonus
and a salary that increases grad ually
ov er time. A s d iscussed by Loew enstein
and Prelec (1993), in the short term,
the preference-for-improv ement motiv e
is sw amped by the high d iscount rates,
but as the d iscount rate falls ov er time,
the preference-for-improv ement motiv e
may gain ascend ance and cause a net
preference for an increasing payment
sequence.
A s another example, introd ucing v is-
ceral influences into mod els of hyper-
bolic d iscounting may more fully account
for the phenomenology of impulsiv e
choices. Hyperbolic-d iscounting mod els
pred ict that people respond especially
strongly to immed iate costs and benefits,
and v isceral influences hav e pow erful
transient effects on immed iate utilities.
In combination, the tw o assumptions could
explain a w id e range of impulsiv e choices
and other self-control phenomena.
6. Measuring T ime Discounting
T he DU mod el assumes that a per-
son's time preference can be captured
by a single d iscount rate, p. Ov er the
past three d ecad es, there hav e been
many attempts to measure this rate.
Some of these estimates are d eriv ed
from observ ations of "real-w orld " be-
hav iors (e.g., the choice betw een elec-
trical appliances that d iffer in their
initial purchase price and long-run op-
erating costs). Others are d eriv ed from
experimental elicitation proced ures
(e.g., respond ents' answ ers to the ques-
tion "Which w ould you prefer: $100
tod ay or $150 one year from tod ay?").
T able 1 summarizes the implicit d is-
count rates from all stud ies that w e
could locate in w hich d iscount rates
w ere either d irectly reported or easily
computed from the reported d ata.
Figure 2 plots the estimated d iscount
factor for each stud y against the publi-
cation d ate for that stud y, w here the d is-
count factor is 6 = 1/(1 + p).27 T his figure
rev eals three notew orthy observ ations.
First, there is tremend ous v ariability in
the estimates (the correspond ing im-
plicit annual d iscount rates range from
-6 percent to infinity). Second , in con-
trast to estimates of physical phenom-
ena such as the speed of light, there is
no ev id ence of method ological progress;
the range of estimates is not shrinking
ov er time. T hird , high d iscounting
pred ominates, as most of the d ata
points are w ell below 1, w hich repre-
sents equal w eighting of present and
future.
In this section, w e prov id e an ov er-
v iew and critique of this empirical lit-
erature w ith an eye tow ard und er-
stand ing these three observ ations. We
first d iscuss a v ariety of confound ing
factors, such as intertemporal arbitrage,
uncertainty, and expectations of chang-
ing utility functions. T hese consid era-
tions typically are not regard ed as legiti-
mate components of time preference
per se, but they can affect both experi-
mental responses and real-w orld choices.
With these confound ing factors in
mind , w e then rev iew the proced ures
used to estimate d iscount rates. T his
section reiterates our general theme: T o
truly und erstand intertemporal choices,
27
In some cases, the estimates are computed
from the med ian respond ent. In other cases, the
authors reported the mean d iscount rate.
T A BLE 1
EMPIR IC A L EST IMA T ES OF DISC OUNT R A T ES
Stud y T ype Good (s) R eal or Hypo? Elicitation Method
Maital & Maital 1978 experimental money & coupons hypo. choice
Hausman 1979 field money real choice
Gateley 1980 field money real choice
T haler 1981 experimental money hypo. matching
A inslie & Haend el 1983 experimental money real matching
Houston 1983 experimental money hypo. other
Loew enstein 1987 experimental money & pain hypo. pricing
Moore and Viscusi 1988 field life years real choice
Benzion et al. 1989 experimental money hypo. matching
Viscusi & Moore 1989 field life years real choice
Moore & Viscusi 1990a field life years real choice
Moore & Viscusi 1990b field life years real choice
Shelley 1993 experimental money hypo. matching
R ed elmeier & Heller 1993 experimental health hypo. rating
C airns 1994 experimental money hypo. choice
Shelley 1994 experimental money hypo. rating
C hapman & Elstein 1995 experimental money & health hypo. matching
Dolan & Gud ex 1995 experimental health hypo. other
Dreyfus and Viscusi 1995 field life years real choice
Kirby & Marakov ic 1995 experimental money real matching
C hapman 1996 experimental money & health hypo. matching
Kirby & Marakov ic 1996 experimental money real choice
Pend er1996 experimental rice real ohoice
Wahlund & Gunnarson 1996 experimental money hypo. matching
C airns & v an d er Pol 1997 experimental money hypo. matching
Green, Myerson & experimental money hypo. choice
McFad d en 1997
Johanneson & Johansson experimental life years hypo. pricing
1997
Kirby 1997 experimental money real pricing
Mad d en et al. 1997 experimental money & heroin hypo. choice
C hapman & Winquist 1998 experimental money hypo. matching
Hold en, Shiferaw & Wik experimental money & corn real matching
1998
C airns & v an d er Pol 1999 experimental health hypo. matching
C hapman, Nelson & Hier experimental money & health hypo. choice
1999
C oller & Williams 1999 experimental money real choice
Kirby, Petry & Bickel 1999 experimental money real choice
v an d er Pol & C airns 1999 experimental health hypo. choice
C hesson & Viscusi 2000 experimental money hypo. matching
Ganiats et al. 2000 experimental health hypo. choice
Hesketh 2000 experimental money hypo. choice
v an d er Pol & C airns 2001 experimental health hypo. choice
Warner & Pleeter 2001 field money real choice
Harrison, Lau & Williams experimental money real choice
2002
T A BLE 1 (C ont.)
A nnual Discount
Stud y T ime R ange A nnual Discount R ate(s) Factor(s)
Maital & Maital 1978 1 year 70% 0.59
Hausman 1979 und efined 5% to 89% 0.95 to 0.53
Gateley 1980 und efined 45% to 300% 0.69 to 0.25
T haler 1981 3 mos. to 10 yrs. 7% to 345% 0.93 to 0.22
A inslie & Haend el 1983 und efined 96000% to 0 0.00
Houston 1983 1 yr. to 20 yrs. 23% 0.81
Loew enstein 1987 immed iately to 10 yrs. -6% to 212% 1.06 to 0.32
Moore and Viscusi 1988 und efined 10% to 12% 0.91 to 0.89
Benzion et al. 1989 6 mos. to 4 yrs. 9% to 60% 0.92 to 0.63
Viscusi & Moore 1989 und efined 11% 0.90
Moore & Viscusi 1990a und efined 2% 0.98
Moore & Viscusi 1990b und efined 1% to 14% 0.99 to 0.88
Shelley 1993 6 mos. to 4 yrs. 8% to 27% 0.93 to 0.79
R ed elmeier & Heller 1993 1 d ay to 10 yrs. 0% 1.00
C airns 1994 5 yrs. to 20 yrs. 14% to 25% 0.88 to 0.80
Shelley 1994 6 mos. to 2 yrs. 4% to 22% 0.96 to 0.82
C hapman & Elstein 1995 6 mos. to 12 yrs. 11% to 263% 0.90 to 0.28
Dolan & Gud ex 1995 1 month to 10 yrs. 0% 1.00
Dreyfus and Viscusi 1995 und efined 11% to 17% 0.90 to 0.85
Kirby
& Marakov ic 1995 3
d ays
to 29
d ays
3678% to
-
0.03 to 0.00
C hapman 1996 1 yr. to 12 yrs. negativ e to 300% 1.01 to 0.25
Kirby & Marakov ic 1996 6 hours to 70 d ays 500% to 1500% 0.17 to 0.06
Pend er 1996 7 mos. to 2 yrs. 26% to 69% 0.79 to 0.59
Wahlund & Gunnarson 1996 1 month to 1 yr. 18% to 158% 0.85 to 0.39
C airns & v an d er Pol 1997 2 yrs. to 19 yrs. 13% to 31% 0.88 to 0.76
Green, Myerson & 3 mos. to 20 yrs. 6% to 111% 0.94 to 0.47
McFad d en 1997
Johanneson & Johansson 6 yrs. to 57 yrs. 0% to 3% 0.97
1997
Kirby 1997 1 d ay to 1 month 159% to 5747% 0.39 to 0.02
Mad d en et al. 1997 1 w eek to 25
yrs.
8% to 0 0.93 to 0.00
C hapman & Winquist 1998 3 months 426% to 2189% 0.19 to 0.04
Hold en, Shiferaw & Wik 1 yr. 28% to 147% 0.78 to 0.40
1998
C airns & v an d er Pol 1999 4 yrs. to 16 yrs. 6% 0.94
C hapman, Nelson & Hier 1 month to 6 mos. 13% to 19000% 0.88 to 0.01
1999
C oller & Williams 1999 1 month to 3 mos. 15% to 25% 0.87 to 0.80
Kirby, Petry & Bickel 1999 7 d ays to 186 d ays 50% to 55700% 0.67 to 0.00
v an d er Pol & C airns 1999 5 yrs. to 13 yrs. 7% 0.93
C hesson & Viscusi 2000 1 year to 25 yrs. 11% 0.90
Ganiats et al. 2000 6 mos. to 20 yrs. negativ e to 116% 1.01 to 0.46
Hesketh 2000 6 mos. to 4 yrs. 4% to 36% 0.96 to 0.74
v an d er Pol & C airns 2001 2 yrs. to 15 yrs. 6% to 9% 0.94 to 0.92
Wamner & Pleeter 2001 immed iately to 22 yrs. 0% to 71% 0 to 0.58
Harrison, Lau & Williams 1 month to 37 mos. 28% 0.78
2002
1.0
-
* . 4 x
10.8
* 0.60- * * *
0.8 * )S~,
0.4
-
$ 0.2
-
0.0
1975 1980 1985 1990 1995 2000
year of publication
Figure 2. Discount Factor by Year of Stud y
Publication
one must recognize the influence of
many consid erations besid es pure time
preference.
6.1 C onfound ing Factors
A w id e v ariety of proced ures hav e
been used to estimate d iscount rates,
but most apply the same basic ap-
proach. Some actual or reported in-
tertemporal preference is observ ed , and
researchers then compute the d iscount
rate that this preference implies, using
a "financial" or net present v alue (NPV)
calculation. For instance, if a person
d emonstrates ind ifference betw een 100
w id gets now and 120 w id gets in one
year, the implicit (annual) d iscount
rate, p, w ould be 20 percent, because
that v alue w ould satisfy the equation
100 = (1/(1 + p))120. Similarly, if a
person is ind ifferent betw een an ineffi-
cient low -cost appliance and a more
efficient one that costs $100 extra but
sav es $20 a year in electricity ov er the
next ten years, the implicit d iscount
rate, p, w ould equal 15.1 percent, be-
cause that v alue w ould satisfy the
equation 100 = =0 1(1/(l + p)) t20.
A lthough this is an extremely w id e-
spread approach for measuring d iscount
rates, it relies on a v ariety of ad d itional
(and usually implicit) assumptions, and is
subject to sev eral confound ing factors.
6.1.1 C onsumption R eallocation
T he calculation outlined abov e as-
sumes a sort of "isolation" in d ecision
making. Specifically, it treats the ob-
jects of intertemporal choice as d is-
crete, unitary, d ated ev ents; it assumes
that people entirely "consume" the re-
w ard (or penalty) at the moment it is
receiv ed , as if it w ere an instantaneous
burst of utility. Furthermore, it assumes
that people d on't shift consumption
around ov er time in anticipation of the
receipt of the future rew ard or penalty.
T hese assumptions are rarely exactly
correct, and may sometimes be bad
approximations. C hoosing betw een $50
tod ay v ersus $100 next year, or choos-
ing betw een 50 pound s of corn tod ay
v ersus 100 pound s next year, are not
the same as choosing betw een 50 utils
tod ay and 100 utils on the same d ay
next year, as the calculations imply.
R ather, they are more complex choices
betw een the v arious streams of con-
sumption that those tw o d ated rew ard s
make possible.
6.1.2 Intertemporal A rbitrage
In theory, choices betw een trad able
rew ard s, such as money, should not re-
v eal anything about time preferences.
A s Victor Fuchs (1982) and others hav e
noted , if capital markets operate effec-
tiv ely (if monetary amounts at d ifferent
times can be costlessly exchanged at a
specified interest rate), choices be-
tw een d ated monetary outcomes can be
red uced to merely selecting the rew ard
w ith the greatest net present v alue
(using the market interest rate).28 T o
28
Meyer (1976) expresses this point: ". . . if w e
can lend and borrow at the same rate . . ., then
w e can simply show that, regard less of the fund a-
mental ord erings on the c's [consumption
streams], the ind uced ord ering on the x's [se-
quences of monetary flow s] is giv en by simple d is-
counting at this giv en rate.. . We could say that
the mar et assumes command and the market rate
prev ails for monetary flow s."
illustrate, suppose a person prefers
$100 now to $200 ten years from now .
While this preference could be ex-
plained by imputing a d iscount rate on
future utility, the person might be
choosing the smaller immed iate amount
because she believ es that through
proper inv estment she can turn it into
more than $200 in ten years, and thus
enjoy more than $200 w orth of con-
sumption at thatfuture time. T he pres-
ence of capital markets should cause
imputed d iscount rates to conv erge on
the market interest rate.
Stud ies that impute d iscount rates
from choices among trad able rew ard s
assume that respond ents ignore oppor-
tunities for intertemporal arbitrage,
either because they are unaw are of
capital markets or unable to exploit
them.29 T he latter assumption may
sometimes be correct. For instance, in
field stud ies of electrical-appliance pur-
chases, some subjects may hav e faced
borrow ing constraints that prev ented
them from purchasing the more expen-
siv e energy-efficient appliances. More
typically, how ev er, imperfect capital
markets cannot explain choices; they
cannot explain w hy a person w ho hold s
sev eral thousand d ollars in a bank ac-
count earning 4-percent interest should
prefer $100 tod ay ov er $150 in one
year. Because imputed d iscount rates
d o not, in fact, conv erge on the prev ail-
ing market interest rates, but instead
are much higher, it seems that many re-
spond ents are neglecting capital mar-
kets and basing their choices on some
other consid eration, such as time pref-
erence or the uncertainty associated
w ith d elay.
6.1.3 C oncav e Utility
T he stand ard approach to estimating
d iscount rates assumes that the utility
function is linear in the magnitud e of
the choice objects (e.g., amounts of
money, pound s of corn, d uration of some
health state). If, instead , the utility
function for the good in question is
concav e, estimates of time preference
w ill be biased upw ard . For example,
ind ifference betw een $100 this year and
$200 next year implies a d ollar d iscount
rate of 100 percent. How ev er, if the
utility of acquiring $200 is less than
tw ice the utility of acquiring $100, the
utility d iscount rate w ill be less than
100 percent. T his confound is rarely
d iscussed , perhaps because utility is as-
sumed to be approximately linear ov er
the small amounts of money commonly
used in time-preference stud ies. T he
ov erw helming ev id ence for reference-
d epend ent utility suggests, how ev er,
that this assumption may be inv alid -
that people may not be integrating the
stated amounts w ith their current and
future w ealth, and therefore that curv a-
ture in the utility function may be
substantial ev en for these small
amounts (see Ian Bateman et al. 1997;
Dav id W. Harless and C olin F. C amerer
1994; Kahneman and T v ersky 1979;
R abin 2000; R abin and T haler 2001;
T v ersky and Kahneman 1991).
T hree techniques could be used to
av oid this confound . (1) One could re-
quest d irect utility jud gments (e.g., at-
tractiv eness ratings) of the same conse-
quence at tw o d ifferent times. T hen,
the ratio of the attractiv eness rating of
29
A rguments
about v iolations of the d iscounted
utility mod el assume, as Pend er (1996, pp. 282-
83) notes, "that the results of d iscount rate ex-
periments rev eal something about intertemporal
preferences d irectly. How ev er, if agents are opti-
mizing an intertemporal utility function, their op-
portunities for intertemporaY arbitrage are also
important in d etermining how they respond to
such experiments . . . w hen trad able rew ard s are
offered , one must either aband on the assumption
that respond ents in experimental stud ies are opti-
mizing, or make some assumptions (either implicit
or explicit) about the nature of cred it markets. T he
implicit assumption in some of the prev ious stud -
ies of d iscount rates appears to be that there are
no possibilities for intertemporal arbitrage. ...
the d istant outcome to the proximate
outcome w ould d irectly rev eal the im-
plicit d iscount factor. (2) T o the extent
that utility is linear in probability, one
can use choices or jud gment tasks in-
v olv ing d ifferent probabilities of the
same consequence at d ifferent times
(A lv in E. R oth and J. Keith Murnighan
1982). Ev id ence that probability is
w eighted nonlinearly (see, e.g., Starmer
2000) w ould , of course, cast d oubt on
this approach. (3) One can separately
elicit the utility function for the good in
question, and then use that function to
transform outcome amounts into utility
amounts, from w hich utility d iscount
rates could be computed . T o our know l-
ed ge, C hapman (1996) cond ucted the
only stud y that attempted to d o this. She
found that utility d iscount rates w ere
substantially low er than the d ollar d is-
count rates, because utility w as strongly
concav e ov er the monetary amounts
subjects used in the intertemporal
choice tasks.30
6.1.4 Uncertainty
In experimental stud ies, subjects are
typically instructed to assume that d e-
layed rew ard s w ill be d eliv ered w ith
certainty. It is unclear w hether subjects
d o (or can) accept this assumption, because
d elay is ord inarily-and perhaps un-
av oid ably-associated w ith uncertainty.
A similar problem arises for field stud -
ies, in w hich it is typically assumed that
subjects believ e that future rew ard s,
such as energy sav ings, w ill materialize.
Because of this subjectiv e (or
"epistemic") uncertainty associated w ith
d elay, it is d ifficult to d etermine to
w hat extent the magnitud e of imputed
d iscount rates (or the shape of the d is-
count function) is gov erned by time
preference per se, v ersus the d iminu-
tion in subjectiv e probability associated
w ith d elay.31
Empirical ev id ence suggests that in-
trod ucing objectiv e (or "aleatory") un-
certainty to both current and future re-
w ard s can d ramatically affect estimated
d iscount rates. For instance, Gid eon
Keren and Peter R oelofsma (1995)
asked one group of respond ents to
choose betw een 100 florins (a Nether-
land s unit of currency) immed iately and
110 florins in one month, and another
group to choose betw een a 50-percent
chance of 100 florins immed iately and a
50-percent chance of 110 florins in one
month. While 82 percent preferred the
smaller immed iate rew ard w hen both
rew ard s w ere certain, only 39 percent
preferred the smaller immed iate rew ard
w hen both rew ard s w ere uncertain.32
A lso, A lbrecht and Weber (1996) found
that the present v alue of a future lottery
(e.g., a 50-percent chance of receiv ing
250 d eutsche marks) tend ed to exceed the
present v alue of its certainty equiv alent.
6.1.5
Inflation
T he stand ard approach assumes that,
for instance, $100 now and $100 in fiv e
years generate the same lev el of utility at
the times they are receiv ed . How ev er,
30
C hapman also found that magnitud e effects
w ere much smaller after correcting for utility
function curv ature. T his result supports Loew en-
stein and Prelec's (1992) explanation of magnitud e
effects as resulting from utility function curv ature
(see section 5.2.2).
31
T here may be complicated interactions be-
tw een risk and d elay, because uncertainty about
future receipt complicates and imped es the plan-
ning of one's future consumption stream (Michael
S pence and R ichard Zeckhauser 1972). For exam-
pIe, a 90-percent chance to w in $10,000,000 in
fifteen years is w orth much less than a guarantee
to receiv e $9,000,000 at that time, because, to the
extent that the person cannot insure against the
resid ual uncertainty, there is a limit to how much
she can ad just her consumption lev el d uring those
fifteen years.
32 T his result cannot be explained by a magni-
tud e effect on the expected amounts, because 50
percent of a rew ard has a smaller expected v alue,
and , accord ing to the magnitud e effect, should be
d iscounted more, not less.
inflation prov id es a reason to d ev alue
future monetary outcomes, because in
the presence of inflation, $100 w orth of
consumption now is more v aluable than
$100 w orth of consumption in fiv e
years. T his confound creates an upw ard
bias in estimates of the d iscount rate,
and this bias w ill be more or less pro-
nounced d epend ing on subjects' ex-
periences w ith and expectations about
inflation.
6.1.6 Expectations of C hanging Utility
A rew ard of $100 now might also gen-
erate more utility than the same amount
fiv e years hence because a person ex-
pects to hav e a larger baseline con-
sumption lev el in fiv e years (e.g., d ue to
increased w ealth). A s a result, the mar-
ginal utility generated by an ad d itional
$100 of consumption in fiv e years may
be less than the marginal utility gener-
ated by an ad d itional $100 of consump-
tion now . Like inflation, this confound
creates an upw ard bias in estimates of
the d iscount rate.
6.1.7 Habit Formation, A nticipatory
Utility, and Visceral
Influences
T o the extent that the d iscount rate is
meant to reflect only time preference,
and not the confluence of all factors
influencing intertemporal choice, the
mod ifications to the instantaneous util-
ity function d iscussed in section 5 rep-
resent ad d itional biasing factors, be-
cause they are typically not accounted
for w hen the d iscount rate is imputed .
For instance, if anticipatory utility moti-
v ates one to d elay consumption more
than one otherw ise w ould , the imputed
d iscount rate w ill be low er than the
true d egree of time preference. If a
person prefers an increasing consump-
tion profile d ue to habit formation, the
d iscount rate w ill be biased d ow nw ard .
Finally; if the prospect of an immed iate
rew ard momentarily stimulates v isceral
factors that temporarily increase the
person's v aluation of the proximate re-
w ard , the d iscount rate could be biased
upw ard .33
6.1.8 A n Illustrativ e Example
T o illustrate the d ifficulty of sepa-
rating time preference per se from
these potential confound s, consid er a
prototypical stud y by Benzion, R apoport,
and Yagil (1989). In this stud y, respon-
d ents equated immed iate sums of money
and larger d elayed sums (e.g., they
specified the rew ard in six months that
w ould be as good as getting $1000 im-
med iately). In the cov er story for the
questionnaire, respond ents w ere asked
to imagine that they had earned money
(amounts ranged from $40 to $5000), but
w hen they arriv ed to receiv e the payment
they w ere told that the "financially
solid " public institute is "temporarily
short of fund s." T hey w ere asked to
specify a future amount of money (d e-
lays ranged from six months to four
years) that w ould make them ind iffer-
ent to the amount they had been prom-
ised to receiv e immed iately. Surely, the
d escription "financially solid " could
scarcely be sufficient to allay uncertain-
ties that the future rew ard w ould actu-
ally be receiv ed (particularly giv en that
the institute w as "temporarily" short of
fund s), and it seems likely that re-
sponses includ ed a substantial "risk
premium." Moreov er, the subjects in
this stud y had "extensiv e experience
w ith . . . a three-d igit inflation rate,"
33It is unclear w hether v isceral factors should
be consid ered a d eterminant of time preference or
a confound ing factor in its estimation. If v isceral
factors increase the attractiv eness of an immed iate
rew ard w ithout affecting its experienced enjoy-
ment (if they increase w anting but not liking),
they are probably best v iew ed as a legitimate
d eterminant of time perference. If, how ev er,
v isceral factors alter the amount of utility that a
contemplated proximate rew ard actually d eliv ers,
they might best be regard ed as a confound ing
factor.
and respond ents might w ell hav e con-
sid ered inflation w hen generating their
responses. Ev en if respond ents assumed
no inflation, the real interest rate d ur-
ing this time w as positiv e, and they
might hav e consid ered intertemporal
arbitrage. Finally, respond ents may hav e
consid ered that their future w ealth
w ould be greater and that the later re-
w ard w ould therefore yield less mar-
ginal utility. Ind eed , the instructions
cued respond ents to consid er this, as
they w ere told that the questions d id
not hav e correct answ ers, and that the
answ ers "might v ary from one ind iv id -
ual to another d epend ing on his or her
present or future financial assets."
Giv en all of these confound ing fac-
tors, is it unclear exactly how much of
the imputed annual d iscount rates
(w hich ranged from 9 percent to 60 per-
cent) actually reflected time prefer-
ence. It is possible that the responses in
this stud y (and others) can be entirely
explained in terms of these confound s,
and that once these confound s are con-
trolled for, no "pure" time preference
w ould remain.
6.2 Proced ures for Measuring Discount
R ates
We d iscussed abov e sev eral con-
found ing factors that greatly complicate
the assignment of a d iscount rate to a
particular choice or jud gment. With
these confound s in mind , w e next d is-
cuss the method s that hav e been used
to measure d iscount rates. Broad ly,
these method s can be d iv id ed into tw o
categories: field stud ies, in w hich d is-
count rates are inferred from economic
d ecisions that people make in their or-
d inary life, and experimental stud ies, in
w hich people are asked to ev aluate styl-
ized intertemporal prospects inv olv ing
real or hypothetical outcomes. T he d if-
ferent proced ures are each subject to
the confound s d iscussed abov e, and , as
w e shall d iscuss, are also influenced
by a v ariety of other factors that are
theoretically irrelev ant, but w hich can
greatly affect the imputed d iscount
rate.
6.2.1 Field Stud ies
Some researchers hav e estimated d is-
count rates by id entifying real-w orld
behav iors that inv olv e trad eoffs be-
tw een the near future and more d istant
future. Early stud ies of this type exam-
ined consumers' choices among d iffer-
ent mod els of electrical appliances,
w hich presented purchasers w ith a
trad eoff betw een the immed iate pur-
chase price and the long-term costs of
running the appliance (as d etermined by
its energy efficiency). In these stud ies,
the d iscount rates implied by consum-
ers' choices v astly exceed ed market in-
terest rates and d iffered substantially
across prod uct categories. T he implicit
d iscount rate w as 17-20 percent for air
cond itioners (Jerry Hausman 1979); 102
percent for gas w ater heaters, 138 per-
cent for freezers, 243 percent for elec-
tric w ater heaters (H. R ud erman, M. D.
Lev ine, and J. E. McMahon 1987); and
from 45 percent to 300 percent for
refrigerators, d epend ing on assump-
tions mad e about the cost of electricity
(Dermot Gately 1980).34
34T hese find ings illustrate how people seem to
ignore intertemporal arbitrage. A s Hausman
(1979) noted , it d oes not make sense for anyone
w ith positiv e sav ings to d iscount future energy sav -
ings at rates higher than the market interest rate.
One possible explanation for these results is that
people are liquid ity constrained . C onsistent w ith
such an account, Hausman found that the d iscount
rate v aried marked ly w ith income-it w as 39 per-
cent for household s w ith und er $10,000 of income,
but just 8.9 percent for household s earning be-
tw een $25,000 and $35,000. How ev er, conflicting
w ith this find ing, a stud y by Douglas Houston
(1983) that presented ind iv id uals w ith a d ecision
of w hether to purchase a hypothetical "energy-
sav ing" d ev ice, found that income "played no sta-
tistically significant role in explaining the lev el of
d iscount rate."
A nother set of stud ies imputes d is-
count rates from w age-risk trad eoffs, in
w hich ind iv id uals d ecid e w hether to
accept a riskier job w ith a higher salary.
Such d ecisions inv olv e a trad eoff be-
tw een quality of life and expected length
of life. T he more that future utility is
d iscounted , the less important is length
of life, making risky but high-paying
jobs more attractiv e. From such trad e-
offs, W. Kip Viscusi and Michael Moore
(1989) conclud ed that w orkers' implicit
d iscount rate w ith respect to future life
years w as approximately 11 percent.
Later, using d ifferent econometric ap-
proaches w ith the same d ata set, Moore
and Viscusi (1990a) estimated the d is-
count rates to be around 2 percent, and
Moore and Viscusi (1990b) conclud ed
that the d iscount rate w as somew here
betw een 1 percent and 14 percent.
Mark Dreyfus and Viscusi (1995) ap-
plied a similar approach to auto-safety
d ecisions and estimated d iscount rates
ranging from 11 percent to 17 percent.
In the macroeconomics literature, re-
searchers hav e imputed d iscount rates
by estimating structural mod els of life-
cycle sav ing behav ior. For instance,
Emily Law rence (1991) used Euler
equations to estimate household time
preferences across d ifferent socioeco-
nomic groups. She estimated the d is-
count rate of med ian-income house-
hold s to be betw een 4 percent and 13
percent d epend ing on the specification.
C hristopher C arroll (1997) criticizes
Euler-equation estimation on the
ground s that most household s tend to
engage mainly in "buffer-stock" sav ing
early in their liv es-they sav e primarily
to be prepared for emergencies-and
only cond uct "retirement" sav ing later
on. R ecent papers hav e estimated rich,
calibrated , stochastic mod els in w hich
household s cond uct buffer-stock sav ing
early in life and retirement sav ing later
in life. Using this approach, C arroll and
A nd rew Samw ick (1997) report point
estimates for the d iscount rate ranging
from 5 percent to 14 percent, and
Pierre-Oliv ier Gourinchas and Jonathan
Parker (2001) report point estimates of
4.0-4.5 percent. Field stud ies of this
type hav e the ad v antage of not assum-
ing isolation, because integrated d eci-
sion making is built into the mod el. But
such estimates often d epend heav ily on
the myriad assumptions includ ed in the
structural mod el.35
R ecently, John Warner and Saul
Pleeter (2001) analyzed d ecisions mad e
by U.S. military serv icemen. A s part of
military d ow nsizing, ov er 60,000 mili-
tary employees w ere giv en the choice
betw een a one-time, lump-sum pay-
ment and an annuity payment. T he sizes
of the payments d epend ed on the em-
ployee's current salary and number of
years of serv ice-e.g., an "E-5" w ith
nine years of serv ice could choose be-
tw een $22,283 now v s. $3,714 ev ery
year for eighteen years. In general, the
present v alue of the annuity payment
equaled the lump-sum payment for a
d iscount rate of 17.5 percent. A lthough
the interest rate w as only 7 percent at
the time of these d ecisions, ov er half of
all military officers and ov er 90 percent
of enlisted personnel chose the lump-
sum payment.36 T his stud y is particu-
larly compelling in terms of cred ibility
of rew ard d eliv ery, magnitud e of stakes,
and number of subjects.37
35
T hese macroeconomics stud ies are not in-
clud ed in the tables and figures, w hich focus pri-
marily on ind iv id ual lev el choice d ata.
36
It should be noted , how ev er, that the guaran-
teed payments in the annuity program w ere not
ind exed for inflation, w hich av eraged 4.2 percent
d uring the four years preced ing this choice.
37 Warner and Pleeter (2001) noted that if
ev eryone had chosen the annuity payment, the
present v alue of all payments w ould hav e been
$4.2 billion. Giv en the choices, how ev er, the
present v alue of the gov ernment payout w as just
2.5 billion. T hus, offering the lump-sum alternativ e
sav ed the fed eral gov ernment $1.7 billion d ollars.
T he benefit of field stud ies, as com-
pared w ith experimental stud ies, is
their high ecological v alid ity. T here is
no concern about w hether estimated
d iscount rates w ould apply to real be-
hav ior because they are estimated from
such behav ior. But field stud ies are sub-
ject to ad d itional confound s d ue to the
complexity of real-w orld d ecisions and
the inability to control for some impor-
tant factors. For example, the high d is-
count rates implied by the w id espread
use of inefficient electrical appliances
might not result from the d iscounting of
future cost sav ings per se, but from
other consid erations, includ ing: (1) a
lack of information among consumers
about the cost sav ings of the more effi-
cient appliances; (2) a d isbelief among
consumers that the cost sav ings w ill be
as great as promised ; (3) a lack of ex-
pertise in translating av ailable informa-
tion into economically efficient d eci-
sions; or (4) hid d en costs of the more
efficient appliances, such as red uced
conv enience or reliability, or, in the case
of light bulbs, because the more effi-
cient bulbs generate a less aesthetically
pleasing light spectra.38
6.2.2 Experimental Stud ies
Giv en the d ifficulties of interpreting
field d ata, the most common method ol-
ogy for eliciting d iscount rates is to so-
licit "paper-and -pencil" responses to
the prospect of real and hypothetical re-
w ard s and penalties. Four experimental
proced ures are commonly used : choice
tasks, matching tasks, pricing tasks, and
ratings tasks.
C hoice tasks are the most common
experimental method for eliciting d is-
count rates. In a typical choice task,
subjects are asked to choose betw een a
smaller, more immed iate rew ard and a
larger, more d elayed rew ard . Of course,
a single choice betw een tw o intertem-
poral options only rev eals an upper or
low er bound on the d iscount rate-for
example, if a person prefers 100 units
of something tod ay ov er 120 units a
year from tod ay, the choice merely im-
plies a d iscount rate of at least 20 per-
cent per year. T o id entify the d iscount
rate more precisely, researchers often
present subjects w ith a series of choices
that v ary the d elay or the amount of the
rew ard s. Some stud ies use real rew ard s,
includ ing money, rice, and corn. Other
stud ies use hypothetical rew ard s, includ -
ing monetary gains and losses, and more
or less satisfying jobs av ailable at
d ifferent times. (See table 1 for a list of
the proced ures and rew ard s used in the
d ifferent stud ies.)
Like all experimental elicitation pro-
ced ures, the results from choice tasks
can be affected by proced ural nuances.
A prev alent problem is an anchoring
effect: w hen respond ents are asked to
make multiple choices betw een imme-
d iate and d elayed rew ard s, the first
choice they face often influences sub-
sequent choices. For instance, people
w ould be more prone to choose $120
next year ov er $100 immed iately if they
first chose betw een $100 immed iately
and $103 next year than if they first
chose betw een $100 immed iately and
$140 next year. In general, imputed d is-
count rates tend to be biased in the d i-
rection of the d iscount rate that w ould
equate the first pair of options to w hich
they are exposed (see Donald Green et
al. 1998). A nchoring effects can be
minimized by using titration proced ures
that expose respond ents to a series of
opposing anchors-e.g., (1) $100 tod ay
or $101 in one year? (2) $100 tod ay or
$10,000 in one year? (3) $100 tod ay or
$105 in one year? and so on. Because
titration proced ures typically only offer
38
For a criticism of the hid d en-costs explana-
tion, how ev er, see Jonathan Koomey and A lan
Sanstad (1994) and R ichard How arth and Sanstad
(1995).
choices betw een an immed iate rew ard
and a greater future rew ard , how ev er,
ev en these proced ures communicate to
respond ents that they should be d is-
counting, and potentially bias d iscount
rates upw ard .
Matching tasks are another popular
method for eliciting d iscount rates. In
matching tasks, respond ents "fill in the
blank" to equate tw o intertemporal
options (e.g., $100 now = in
one year). Matching tasks hav e been
cond ucted w ith real and hypothetical
monetary outcomes and w ith hypotheti-
cal av ersiv e health cond itions (again see
table 1 for a list of the proced ures and
rew ard s used in d ifferent stud ies).
Matching tasks hav e tw o ad v antages
ov er choice tasks. First, because sub-
jects rev eal an ind ifference point, an
exact d iscount rate can be imputed
from a single response. Second , because
the intertemporal options are not fully
specified , there is no anchoring prob-
lem and no suggestion of an expected
d iscount rate (or range of d iscount rates).
T hus, unlike choice tasks, matching tasks
cannot be accused of simply recov ering
the expectations of the experimenters
that guid ed the experimental d esign.
A lthough matching tasks hav e some
ad v antages ov er choice tasks, there are
reasons to be suspicious of the re-
sponses obtained . First, responses often
appear to be gov erned by the applica-
tion of some simple rule rather than by
time preference. For example, w hen
people are asked to state the amount in
n years that equals $100 tod ay, a v ery
common response is $100*n. Second ,
the responses are often v ery "coarse"-
often multiples of tw o or ten of the im-
med iate rew ard , suggesting that respon-
d ents d o not (or cannot) think v ery
carefully about the task. T hird , and
most importantly, there are large d iffer-
ences in imputed d iscount rates among
sev eral theoretically equiv alent proce-
d ures. T w o intertemporal options could
be equated or matched in one of four
w ays: R espond ents could be asked to
specify (1) the amount of a d elayed re-
w ard that w ould make it as attractiv e
as a giv en immed iate rew ard (w hich is
the most common technique); (2) the
amount of an immed iate rew ard that
makes it as attractiv e as a giv en d elayed
rew ard (A lbrecht and Weber 1996); (3)
the maximum length of time they w ould
be w illing to w ait to receiv e a larger re-
w ard in lieu of an immed iately av ailable
smaller rew ard (A inslie and Haend el
1983; R oelofsma 1994); or (4) the latest
d ate at w hich they w ould accept a
smaller rew ard in lieu of receiv ing a
larger rew ard at a specified d ate that is
later still.
While there is no theoretical basis for
preferring one of these method s ov er
any other, the small amount of empiri-
cal ev id ence comparing d ifferent meth-
od s suggests that they yield v ery d iffer-
ent d iscount rates. R oelofsma (1994)
found that implicit d iscount rates v aried
tremend ously d epend ing on w hether re-
spond ents matched on amount or time.
One group of subjects w as asked to in-
d icate how much compensation they
w ould d emand to allow a purchased bi-
cycle to be d eliv ered nine months late.
T he med ian response w as 250 florins.
A nother group w as asked how long they
w ould be w illing to d elay d eliv ery of the
bicycle in exchange for 250 florins. T he
mean response w as only three w eeks,
implying a d iscount rate that is tw elv e
times higher. Fred erick and R ead (2002)
found that implicit d iscount rates w ere
d ramatically higher w hen respond ents
generated the future rew ard that w ould
equal a specified current rew ard than
w hen they generated a current rew ard
that w ould equal a specified future re-
w ard . Specifically, w hen respond ents
w ere asked to state the amount in thirty
years that w ould be as good as getting
$100 tod ay, the med ian response w as
$10,000 (implying that a future d ollar is
1/100th as v aluable), but w hen asked to
specify the amount tod ay that is as good
as getting $100 in thirty years, the me-
d ian response w as $50 (implying that a
future d ollar is 1/2 as v aluable).
T w o other experimental proced ures
inv olv e rating or pricing temporal pros-
pects. In rating tasks, each respond ent
ev aluates an outcome occurring at a
particular time by rating its attractiv e-
ness or av ersiv eness. In pricing tasks,
each respond ent specifies a w illingness
to pay to obtain (or av oid ) some real or
hypothetical outcome occurring at a
particular time, such as a monetary re-
w ard , d inner coupons, an electric shock,
or an extra year ad d ed to the end of
one's life. (Once again, see table 1 for a
list-of the proced ures and rew ard s used
in the d ifferent stud ies.) R ating and
pricing tasks d iffer from choice and match-
ing tasks in one important respect.
Whereas choice and matching tasks call
attention to time (because each respon-
d ent ev aluates tw o outcomes occurring at
tw o d ifferent times), rating and pricing
tasks permit time to be manipulated be-
tw een subjects (because a single respon-
d ent may ev aluate either the immed iate
or d elayed outcome, by itself).
Loew enstein (1988) found that the
timing of an outcome is much less im-
portant (d iscount rates are much low er)
w hen respond ents ev aluate a single out-
come at a particular time than w hen
they compare tw o outcomes occurring
at d ifferent times, or specify the v alue
of d elaying or accelerating an outcome.
In one stud y, for example, tw o groups
of stud ents w ere asked how much they
w ould pay for a $100 gift certificate at
the restaurant of their choice. One
group w as told that the gift certificate
w as v alid immed iately. T he other w as
told it could be used beginning six
months from now . T here w as no signifi-
cant d ifference in the v aluation of the
tw o certificates betw een the tw o groups,
w hich implies negligible d iscounting.
How ev er, w hen asked how much they
w ould pay [hav e to be paid ] to use it six
months earlier [later], the timing be-
came important-the d elay group w as
w illing to pay $10 to exped ite receipt of
the d elayed certificate, w hile the imme-
d iate group d emand ed $23 to d elay the
receipt of a certificate they expected to
be able to use immed iately.39
A nother important d esign choice in
experimental stud ies is w hether to use
real or hypothetical rew ard s. T he use of
real rew ard s is generally d esirable for
obv ious reasons, but hypothetical re-
w ard s actually hav e some ad v antages in
this d omain. In stud ies inv olv ing hypo-
thetical rew ard s, respond ents can be
presented w ith a w id e range of rew ard
amounts, includ ing losses and large
gains, both of w hich are generally infea-
sible in stud ies inv olv ing real outcomes.
T he d isad v antage of hypothetical choice
d ata is the uncertainty about w hether
people are motiv ated to, or capable of,
accurately pred icting w hat they w ould
d o if outcomes w ere real.
T o our know led ge, only tw o stud ies
hav e compared d iscounting betw een
real and hypothetical rew ard s. Kirby
and Marakov ic (1995) asked subjects to
state the immed iate amount that w ould
make them ind ifferent to some fixed d e-
layed amount (d elayed rew ard sizes
w ere $14.75, $17.25, $21.00, $24.50,
$28.50; d elays w ere 3, 7, 13, 17, 23, and
29 d ays). One group of subjects an-
sw ered all thirty permutations for real
rew ard s, and another group of subjects
39R ating tasks (and probably pricing tasks as
w ell) are subject to anchoring effects. Shelley and
T homas Omer (1996), Mary Kay Stev enson (1992),
and others hav e found that a giv en d elay (e.g., six
months) prod uces greater time d iscounting w hen
it is consid ered alongsid e shorter d elays (e.g., one
month) than w hen it is consid ered alongsid e
longer d elays (e.g., three years).
answ ered all thirty permutations for
hypothetical rew ard s. Discount rates
w ere low er for hypothetical rew ard s.40
Maribeth C oller and Melonie Williams
(1999) asked subjects to choose be-
tw een $500 payable in one month and
$500 + $x payable in three months,
w here $x w as v aried from $1.67 to
$90.94 across fifteen d ifferent choices.
In one cond ition, all choices w ere hypo-
thetical; in fiv e other cond itions, one
person w as rand omly chosen to receiv e
her preferred outcome for one of her
fifteen choices. T he raw d ata suggest
again that d iscount rates w ere consid -
erably low er in the hypothetical cond i-
tion, although they suggest that this
conclusion is not supported after con-
trolling for censored d ata, d emographic
d ifferences, and heterosked asticity
(across d emographic d ifferences and
across treatmentsS).41 T hus, there is, as
of yet, no clear ev id ence that hypotheti-
cal rew ard s are d iscounted d ifferently
than real rew ard s.42
6.3 C onclusion: What Is T ime
Preference?
Figure 2 rev eals spectacular d isagree-
ment among d ozens of stud ies that all
purport to be measuring time prefer-
ence. T his lack of agreement likely re-
flects the fact that the v arious elicita-
tion proced ures used to measure time
preference consistently fail to isolate
time preference, and instead reflect, to
v arying d egrees, a blend of both pure
time preference and other theoretically
d istinct consid erations, includ ing: (a)
intertemporal arbitrage, w hen trad eable
rew ard s are used ; (b) concav e utility; (c)
uncertainty that the future rew ard or
penalty w ill actually obtain; (d ) inflation,
w hen nominal monetary amounts are used ;
(e) expectations of changing utility; and
(f) consid erations of habit formation,
anticipatory utility, and v isceral influences.
Figure 2 also rev eals a pred ominance
of high implicit d iscount rates-d is-
count rates w ell abov e market interest
rates. T his consistent find ing may also
be d ue to the presence of the v arious
extra-time-preference consid erations listed
abov e, because nearly all of these w ork
to bias imputed d iscount rates upw ard -
only habit formation and anticipatory
utility bias estimates d ow nw ard . If these
confound ing factors w ere ad equately
controlled , w e suspect that many in-
tertemporal choices or jud gments w ould
imply much low er-ind eed , possibly
ev en zero-rates of time preference.
Our d iscussion in this section high-
lights the conceptual and semantic am-
biguity about w hat the concept of "time
preference" ought to includ e-about
w hat properly counts as time prefer-
ence per se and w hat ought to be called
something else (for further d iscussion,
40T he tw o results w ere not strictly comparable,
how ev er, because they used a d ifferent proced ure
for the real rew ard s than for the hypothetical re-
w ard s. A n auction proced ure w as used for the
real-rew ard s group only. Subjects w ere told that
w hoev er, of three subjects, stated the low est im-
med iate amount w ould receiv e the immed iate
amount, and the other tw o
subjects
w ould receiv e
the d elayed amount. Optimal behav ior in such a
situation inv olv es ov erbid d ing. Since this creates
a d ow nw ard bias in d iscount rates for the real-
rew ard s group, how ev er, it d oes not explain aw ay
the find ing that real d iscount rates w ere higher
than hypothetical d iscount rates.
41
It is hard to und erstand w hich control elimi-
nates the d ifferences that are apparent in the raw
d ata. It w ould seem not to be the d emographic
d ifferences per se, because the hypotheticafcond i-
tion had a "substantially higher proportion of non-
w hite participants" (p. 121) and "non-w hites on av -
erage rev eal d iscount rates that are nearly 21
percentage points higher than those rev ealed by
w hites" (p. 122).
42
T here has been consid erable recent d ebate
outsid e of the context of intertemporal choice
about w hether hypothetical choices are repre-
sentativ e of d ecisions w ith real consequences. T he
general conclusion from this d ebate is that the tw o
method s typically yield qualitativ ely similar results
(see C amerer and R obin Hogarth 1999 for a re-
cent rev iew ), though systematic d ifferences hav e
been observ ed in some stud ies (R onald C ummings,
Glenn Harrison, and Elisabet R utstrom 1995;
Yoram Kroll, Haim Lev y, and R apoport 1988).
future consequence future utility is
confers less utility less important
- -.7 - - -- - - - - --- i- -- -.
uncertainty
opportunitv
costs iupw -. .r
changing tastes
increased w xealth
.
it
..
A mount WVeighting
of utility of
utility
Figure 3.
see Fred erick 1999). We hav e argued
here that many of the reasons for caring
w hen something occurs (e.g., uncer-
tainty or utility of anticipation) are not
time preference, because they pertain
to the expected amount of utility conse-
quences confer, and not to the w eight
giv en to the utility of d ifferent moments
(see figure 3, ad apted from Fred erick
1999). How ev er, it is not obv ious w here
to d raw the line betw een factors that
operate through utilities and factors
that make up time preference.
Hopefully, economists w ill ev entually
achiev e a consensus about w hat is
includ ed in, and exclud ed from, the
concept of time preference. Until then,
d raw ing attention to the ambiguity of
the concept w ill hopefully improv e the
quality of d iscourse by increasing aw are-
ness that, in d iscussions about time
preference, d ifferent people may be using
the same term to refer to significantly
d ifferent und erlying constructs.43
7. Utnpacking T ime Preference
A s d etailed in section 2, early tw entieth-
century economists' conceptions of inter-
temporal choice includ ed d etailed
accounts of d isparate und erlying psy-
chological motiv es. With the ad v ent
of the DU mod el in 1937, how ev er,
economists eschew ed consid erations of
specific motiv es, proceed ing as if all in-
tertemporal behav ior could be explained
by the unitary construct of time prefer-
ence. In sections 5 and 6, w e highlighted
sev eral factors that influence intertem-
poral d ecisions, but w hich w ould not be
consid ered time preference as the term
is ord inarily used . In this section, w e turn
our focus inw ard and question w hether
ev en time preference itself should be
regard ed as a unitary construct.
Issues of this type are hotly d ebated
in psychology. For example, psycholo-
gists d ebate the usefulness of conceptu-
alizing intelligence in terms of a single
unitary "g" factor. T ypically, a posited
psychological construct (or "trait") is
consid ered useful only if it satisfies
three criteria: (1) it remains relativ ely
constant across time w ithin a particular
ind iv id ual; (2) it pred icts behav ior
across a w id e range of situations, and
(3) d ifferent measures of it correlate
highly w ith one another. T he concept of
intelligence satisfies these criteria fairly
w ell.44 First, performance in tests of
43
Not only d o people use the same term to re-
fer to d ifferent concepts (or sets of concepts), they
also use d ifferent terms to represent the same
concept. T he w elter of terms used in d iscussions
of intertemporal choice includ e: d iscount factor,
d iscount rate, marginal priv ate rate of d iscount,
social d iscount rate, utility d iscount rate, marginal
social rate of d iscount, pure d iscounting, time
preference, subjectiv e rate of time preference,
pure time preference, marginal rate of time pref-
erence, social rate of time preference, ov erall time
preference, impatience, time bias, temporal orien-
tation, consumption rate of interest, time positiv ity
inclination, and "the pure futurity effect." John
Broome (1995, pp. 128-29) notes that some of the
controv ersv about d iscounting results from d iffer-
ences in how the term is used : "On the face of it
. . . tv pical economists and typical philosophers
seem to d isagree. But actualty I think there is
more misund erstand ing here than d isagreement
. . . When economists and philosophers think of
d iscounting, they typically think of d iscounting d if-
ferent things. Economists
typicallv
d iscount the
sorts of good s that are bought and sold in markets
[w hereas] philosophers are tv pically thinking of a
more fund amental good , people's w ell-being . . .
It is perfectlv consistent to d iscount commod ities
and not w ell-being."
44 Debates remain, how ev er, about w hether
trad itional measures exclud e important d imen-
sions, and w hether a multid imensional account of
cognitiv e ability at early ages correlates
highly w ith performance on such tests
at all subsequent ages. Second , cogni-
tiv e ability (as measured by such tests)
pred icts a w id e range of important life
outcomes, such as criminal behav ior
and income. T hird , abilities that w e re-
gard as expressions of intelligence correlate
strongly w ith each other. Ind eed , w hen
d iscussing the construction of intelligence
tests, Herrnstein and C harles Murray
(1994, p. 3) note that, "It turned out to
be nearly impossible to d ev ise items
that plausibly measured some cognitiv e
skill [w hich] w ere not positiv ely corre-
lated w ith other items that plausibly
measured some cognitiv e skill."
T he posited construct of time prefer-
ence d oes not fare as w ell by these cri-
teria. First, no longitud inal stud ies hav e
been cond ucted to permit any conclu-
sions about the temporal stability of
time preference.45 Second , correlations
betw een v arious measures of time pref-
erence or betw een measures of time
preference and plausible real-w orld
expressions of it are mod est, at best.
C hapman and Elstein (1995) and C hap-
man, R ichard Nelson, and Daniel Hier
(1999) found only w eak correlations
betw een d iscount rates for money and
for health, and C hapman and Elstein
(1995) found almost no correlation be-
tw een d iscount rates for losses and for
gains. Fuchs (1982) found no correlation
betw een a prototypical measure of time
preference (e.g., "Would you choose
$1500 now or $4000 in fiv e years?") and
other behav iors that w ould plausibly be
affected by time preference (e.g., smok-
ing, cred it-card d ebt, seat-belt use, and
the frequency of exercise and d ental
checkups). Nor d id he find much corre-
lation among any of these reported be-
hav iors (see also Nyhus 1995).46 C hap-
man and Elliot C oups (1999) found that
corporate employees w ho chose to re-
ceiv e an influenza v accination d id hav e
significantly low er d iscount rates (as in-
ferred from a matching task w ith mone-
tary losses), but found no relation
betw een v accination behav ior and
hypothetical questions inv olv ing health
outcomes. Lalith Munasinghe and
Sicherman (2000) found that smokers
tend to inv est less in human capital
(they hav e flatter w age profiles), and
many others hav e found that for stylized
intertemporal choices among monetary
rew ard s, heroin ad d icts hav e higher d is-
count rates (e.g., Leanne A lv os, R . A .
Gregson, and Michael R oss 1993; Kirby,
Petry, and Bickel 1999; Gregory Mad -
d en et al. 1997; T homas Murphy and
A lan De Wolfe 1986; Petry, Bickel, and
Martha A rnett 1998).
A lthough the ev id ence in fav or of a
single construct of time preference
is hard ly compelling, the low cross-
behav ior correlations d o not necessarily
intelligence w ould hav e ev en greater explanatory
pow er. R obert Sternberg (1985), for example, ar-
gues that intelligence is usefully d ecomposed into
three d imensions: (1) analytical intelligence,
w hich includ es the ability to id entify problems,
compute strategies, and monitor solutions, and is
measured w ell by existing IQ tests; (2) creativ e
intelligence, w hich reflects the ability to generate
problem-solv ing options, and (3) practical intelli-
gence, w hich inv olv es the ability to implement
problem-solv ing options.
45
A lthough
there hav e been no longitud inal
stud ies of time preference per se, Mischel and his
colleagues d id find that a child 's capacity to d elay
gratification w as significantly correlated w ith other
v ariables assessed d ecad es later, includ ing aca-
d emic achiev ement and self esteem (Ozlem A yd uk
et al. 2000; Mischel, Yuichi Shod a, and Peake
1988; Shod a, Mischel, and Peake 1990). Of course,
this prov id es ev id ence for construct v alid ity only
to the extent that one v iew s these other v ariables
as expressions of time preference. We also note
that w hile there is little ev id ence that intertempo-
ral behav iors are stable ov er long period s, there is
some ev id ence that time preference is not strictly
constant ov er time for all people. Heroin ad d icts
d iscount both d rugs and money more steeply
w hen they are crav ing heroin than w hen they are
not (Louis Giord ano et al. 2001).
46A similar lack of intraind iv id ual consistency
has been observ ed in risk-taking (Kennet
MacC rimmon and Donald Wehrung 1990).
d isprov e the existence of time prefer-
ence. Suppose, for example, that some-
one expresses low d iscount rates on a
conv entional elicitation task, yet ind i-
cates that she rarely exercises. While it
is possible that this inconsistency re-
flects true heterogeneity in the d egree
to w hich she d iscounts d ifferent types
of utility, perhaps she rarely exercises
because she is so busy at w ork earning
money for her future or because she
simply cares much more about her fu-
ture finances than her future card iov as-
cular cond ition. Or, perhaps she d oesn't
believ e that exercise improv es health.
A s this example suggests, many factors
could w ork to erod e cross-behav ior cor-
relations, and thus, such low correlations
d o not mean that there can be no single
unitary time preference, und erlying all
intertemporal choices (the intertempo-
ral analog to hypothesized construct of "g"
in analyses of cognitiv e performance).
How ev er, notw ithstand ing this d is-
claimer, in our v iew the cumulativ e ev i-
d ence raises serious d oubts about w hether
there is, in fact, such a construct-a sta-
ble factor that operates id entically on, and
applies equally to, all sources of utility.47
T o better und erstand the pattern of
correlations in implied d iscount rates
across d ifferent types of intertemporal
behav iors, w e may need to unpack time
preference itself into more fund amental
motiv es, as illustrated by the segmenta-
tion of the d elta component of figure 3.
Loew enstein et al. (2001) hav e pro-
posed three specific constituent mo-
tiv es, w hich they labeled impulsiv ity
(the d egree to w hich an ind iv id ual acts
in a spontaneous, unplanned fashion),
compulsiv ity (the tend ency to make
plans and stick w ith them), and inhibi-
tion (the ability to inhibit the automatic
or "knee-jerk" response to the appetites
and emotions that trigger impulsiv e be-
hav ior).48 Preliminary ev id ence sug-
gests that these subd imensions of time
preference can be measured reliably.
Moreov er, the d ifferent subd imensions
pred ict d ifferent behav iors in a highly
sensible w ay. For example, repetitiv e
behav iors such as flossing one's teeth,
exercising, paying one's bills on time,
and arriv ing on time at meetings w ere
all pred icted best by. the compulsiv ity
subd imension. Viscerally d riv en behav -
iors, such as reacting aggressiv ely to
someone in a car w ho honks at you at a
red light, w ere best pred icted by impul-
siv ity (positiv ely) and behav ioral inhibi-
tion (negativ ely). Money-related behav -
iors such as sav ing money, hav ing
unpaid cred it-card balances, or being
maxed out on one or more cred it card s
w ere best pred icted by conv entional
measures of d iscount rates (but impul-
siv ity and compulsiv ity w ere also highly
significant pred ictors).
C learly, further research is need ed to
ev aluate w hether time preference is
best v iew ed as a unitary construct or a
composite of more basic constituent
motiv es. Further efforts hopefully w ill
be informed by recent d iscov eries of
neuroscientists, w ho hav e id entified re-
gions of the brain w hose d amage lead s
to extreme myopia (A ntonio R . Damasio
1994) and areas that seem to play an
important role in suppressing the be-
hav ioral expression of urges (Joseph E.
47
Note that one can also ov erestimate the
strength of the relationship betw een measured
time preference and time-related behav iors or be-
tw een d ifferent time-related behav iors if these
v ariables are related to characteristics such as in-
telligence, social class, or social conformity, that
are not ad equately measured and controlled for.
48
R ecent research by R oy Baumeister, T od d
Heatherton, and Diane T ice (1994) suggests that
such "behav ioral inhibition" requires an expend i-
ture of mental effort that, like other forms of
effort, d raw s on limited resources-a "pool" of
w illpow er (Loew enstein 2000a). T heir research
show s that behav ioral inhibition in one d omain
(e.g., refraining from eating d esirable food ) re-
d uces the ability to exert w illpow er in another d o-
main (e.g., completing a taxing mental or physical
task).
Fred erick, Loew enstein, and O'Donoghue: T ime Discounting
393
LeDoux 1996). If some behav iors are
best pred icted by impulsiv ity, some by
compulsiv ity, some by behav ioral inhi-
bition, and so on, it may be w orth the
effort to measure preferences at this
lev el and to d ev elop mod els that treat
these components separately. Of course,
such multid imensional perspectiv es w ill
inev itably be more d ifficult to opera-
tionalize than formulations like the DU
mod el, w hich represent time preference
as a unid imensional construct.
8. C onclusions
T he DU mod el, w hich continues to
be w id ely used by economists, has little
empirical support. Ev en its d ev elopers-
Samuelson, w ho originally proposed the
mod el, and Koopmans, w ho prov id ed
the first axiomatic d eriv ation-had con-
cerns about its d escriptiv e realism, and
it w as nev er empirically v alid ated as the
appropriate mod el for intertemporal
choice. Ind eed , v irtually ev ery core and
ancillary assumption of the DU mod el
has been called into question by empiri-
cal ev id ence collected in the past tw o
d ecad es. T he insights from this empiri-
cal research hav e spaw ned new theories
of intertemporal choice that rev iv e many
of the psychological consid erations d is-
cussed by early stud ents of intertempo-
ral choice-consid erations that w ere ef-
fectiv ely d ismissed w ith the introd uction
of the DU mod el. A d d itionally, some of
the most recent theories show that in-
tertemporal behav iors may be d ramatically
influenced by people's lev el of und er-
stand ing of how their preferences
change-by their "metaknow led ge"
about
their preferences (see, e.g., O'Donoghue
and R abin 1999b; Loew enstein,
O'Donoghue, and R abin 2000).
While the DU mod el assumes that in-
tertemporal preferences can be charac-
terized by a single d iscount rate, the
large empirical literature d ev oted to
measuring d iscount rates has failed to
establish any stable estimate. T here is
extraord inary v ariation across stud ies,
and sometimes ev en w ithin stud ies.
T his failure is partly d ue to v ariations in
the d egree to w hich the stud ies take ac-
count of factors that confound the com-
putation of d iscount rates (e.g., uncer-
tainty about the d eliv ery of future
outcomes or nonlinearity in the utility
function). But the spectacular cross-
stud y d ifferences in d iscount rates also
reflect the d iv ersity of consid erations
that are relev ant in intertemporal
choices and that legitimately affect d if-
ferent types of intertemporal choices
d ifferently. T hus, there is no reason
to expect that d iscount rates should be
consistent across d ifferent choices.
T he id ea that intertemporal choices
reflect an interplay of d isparate and
often competing psychological motiv es
w as commonplace in the w ritings of
early tw entieth-century economists. We
believ e that this approach should be
resurrected . R eintrod ucing the multiple-
motiv es approach to intertemporal choice
w ill help us to better und erstand and
better explain the intertemporal choices
w e observ e in the real w orld . For
instance, it permits more scope for
und erstand ing ind iv id ual d ifferences
(e.g., w hy one person is a spend thrift
w hile his neighbor is a miser, or w hy
one person d oes d rugs w hile her
brother d oes not), because people may
d iffer in the d egree to w hich they ex-
perience anticipatory utility or are
influenced by v isceral factors.
T he multiple-motiv e approach may be
ev en more important for und erstand ing
intra-ind iv id ual d ifferences. When one
looks at the behav ior of a single ind iv id -
ual across d ifferent d omains, there is
often a w id e range of apparent attitud es
tow ard the future. Someone may smoke
heav ily, but carefully stud y the returns
of v arious retirement packages. A nother
may squirrel money aw ay w hile, at the
same time, giv ing little thought to elec-
trical efficiency w hen purchasing an air
cond itioner. Someone else may d ev ote
tw o d ecad es of his life to establishing a
career, and then jeopard ize this long-
term inv estment for some highly tran-
sient pleasure. Since the DU mod el as-
sumes a unitary d iscount rate that
applies to all acts of consumption, such
intra-ind iv id ual heterogeneities pose a
theoretical challenge. T he multiple-
motiv e approach, by contrast, allow s us
to read ily interpret such d ifferences in
terms of more narrow , more legitimate,
and more stable constructs-e.g., the
d egree to w hich people are skeptical of
promises, experience anticipatory util-
ity, are influenced by v isceral factors, or
are able to correctly pred ict their future
utility.
T he multiple-motiv e approach may
sound excessiv ely open-end ed . We hav e
d escribed a v ariety of consid erations
that researchers could potentially incor-
porate into their analyses. Includ ing
ev ery consid eration w ould be far too
complicated , w hile picking and choos-
ing w hich consid erations to incorporate
may leav e one open to charges of being
ad hoc. How , then, should economists
proceed ?
We believ e that economists should
proceed as they typically d o. Economics
has alw ays been both an art and a sci-
ence. Economists are forced to intuit,
to the best of their abilities, w hich con-
sid erations are likely to be important in
a particular d omain and w hich are likely
to be largely irrelev ant. When econo-
mists mod el labor supply, for instance,
they typically d o so w ith a utility func-
tion that incorporates consumption and
leisure, but w hen they mod el inv est-
ment d ecisions, they typically assume
that preferences are d efined ov er
w ealth. Similarly, a researcher inv esti-
gating charitable giv ing might use a
utility function that incorporates altru-
ism but not risk av ersion or time prefer-
ence, w hereas someone stud ying inv es-
tor behav ior is unlikely to use a utility
function that incorporates altruism. For
each d omain, economists choose the
utility function that is best able to in-
corporate the essential consid erations
for that d omain, and then ev aluate
w hether the inclusion of specific con-
sid erations improv es the pred ictiv e or
explanatory pow er of a mod el. T he
same approach can be applied to
multiple-motiv e mod els of intertemporal
choice. For d rug ad d iction, for exam-
ple, habit formation, v isceral factors,
and hyperbolic d iscounting seem likely
to play a prominent role. For extend ed
experiences, such as health states, ca-
reers, and long v acations, the prefer-
ence for improv ement is likely to come
into play. For brief, v iv id experiences,
such as w ed d ings or criminal sanctions,
utility from anticipation may be an
important d eterminant of behav ior.
In sum, w e believ e that economists'
und erstand ing of intertemporal choices
w ill progress most rapid ly by continuing
to import insights from psychology, by
relinquishing the assumption that the
key to und erstand ing intertemporal
choices is find ing the right d iscount
rate (or ev en the right d iscount func-
tion), and by read opting the v iew that
intertemporal choices reflect many d is-
tinct consid erations and often inv olv e
the interplay of sev eral competing mo-
tiv es. Since d ifferent motiv es may be
ev oked to d ifferent d egrees by d ifferent
situations (and by d ifferent d escriptions
of the same situation), d ev eloping d e-
scriptiv ely ad equate mod els of in-
tertemporal choice w ill not be easy. But
w e hope this paper w ill help.
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