Re: Market failure to sufficently weigh the future

From: Robin Hanson (
Date: Tue Oct 31 2000 - 12:21:04 MST

Hal Finney wrote:
> > ... you are implicitly challenged to come up with an alternative
> > formulation which supports the alternative conclusions you favor.
>... discounting is rational and appropriate based on future uncertainty.
>... x1+x2 = constant. This neglects growth of the stock of goods, but I
>think growth rates may have historically been negligible compared to
>the risk of accidental loss. ... U = U(x1) + (1-p)*U(x2).
>rationally consume more in the first period than in the second.
>With this calculation built into our preferences via generations of
>evolution, ... The authors' argument does not seem to address the
>possibility that discounting is rational and appropriate. They view
>the effect as purely psychological or even philosophical. Discounting
>the future can be modelled as a fully rational process.

It is standard practice to describe the discount rate in simple
examples where there is no uncertainty, but I'm very sure the authors
are well aware that real decisions have uncertainty, and that they
intended their discount rate to be used in the standard expected
utility framework when there is uncertainty.

It really doesn't matter for the purposes of the paper where people's
time preferences come from. It just matters that people have them.

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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