Re: Market failure to sufficently weigh the future?

From: Robin Hanson (
Date: Sat Oct 28 2000 - 11:48:16 MDT

Hal Finney wrote:
> >
> >... agents discount the future too much ...
>I've just read the first 10 pages or so, I'm not sure I agree ...
>Their basic point seems to be that people prefer present pleasure over
>future pleasure, but then when they get to the future, they regret their
>past choices. I don't think this is as universal as they make it out
>to be, although certainly there are some instances in which it happens.

The main question is whether this their assumption is true on average, i.e.,
whether this happens more often than not. Imagine you can get a 10% annual
return on your investments. Then choosing to save $1 more today and invest
it for ten years is a choice between $1 today and $2.60 ten years in the
future. When you invest as much as you want then on the margin you are just
indifferent between having one more dollar today to spend today, and having
2.6 more dollars in ten years to spend then.

Now imagine that you could break causality and give $1 to yourself ten years
ago to spend then. How much would you be willing to pay today, and not spend
today, for this privilege? If you would be willing to pay $2.60 today, your
preferences are time-consistent. If you would be willing to pay less than
$2.60, you fit the assumption made by Caplin & Leahy. If you would be willing
to pay more than $2.60, your preferences are time-inconsistent in the opposite

It seems plausible to me that most people would be willing to pay less than
$2.60 to give their ten year ago self $1. But it would be nice to have
clearer data on this.

>While this little story does have enough of a germ of truth that we can
>recognize some elements in our own lives, I think it is not a universal
>experience for all of our consumption. It has a childish quality, the
>stupidity and naivity of our character as he continually berates himself
>for behaviors in the past which he continues to follow in the present.
>His inability to learn from his mistakes, while a weakness that we can all
>identify with to some extent, is something that most of us can overcome.

It is fundamentally not an issue of learning. It is a conflict of preferences.

Robin Hanson
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326 FAX: 703-993-2323

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