Working Paper: NBER ID: w31047
Authors: Benjamin Enke; Thomas Graeber; Ryan Oprea
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.
Keywords: intertemporal choice; complexity; behavioral anomalies; present bias
JEL Codes: D03
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| complexity (C60) | intertemporal choice anomalies (D15) |
| cognitive uncertainty (D80) | short-run impatience (D15) |
| choice inconsistency (D80) | hyperbolic discounting (D15) |
| complexity (C60) | cognitive uncertainty (D80) |
| complexity (C60) | choice inconsistency (D80) |
| cognitive uncertainty + choice inconsistency (D80) | intertemporal choice anomalies (D15) |
| complexity (C60) | decreasing impatience (D15) |