Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282549 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10861
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
A large literature shows that people discount financial rewards hyperbolically instead of exponentially. While discounting of money has been questioned as a measure of time preferences, it continues to be highly relevant in empirical practice and predicts a wide range of real-world behaviors, creating a need to understand what generates the hyperbolic pattern. We provide evidence that hyperbolic discounting reflects mistakes that are driven by the complexity of evaluating delayed payoffs. In particular, we document that hyperbolicity (i) is strongly associated with choice inconsistency and cognitive uncertainty, (ii) increases in overt complexity manipulations and (iii) arises nearly identically in computationally similar tasks that involve no actual payoff delays. Our results suggest that even if people had exponential discount functions, complexity-driven mistakes would cause them to make hyperbolic choices. We examine which experimental techniques to estimate present bias are (not) confounded by complexity.
Subjects: 
hyperbolic discounting
present bias
bounded rationality
cognitive uncertainty
JEL: 
C91
D91
G00
Document Type: 
Working Paper
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