Cognitive Procedures and Hyperbolic Discounting

"Hyperbolic discount functions are characterized by a relatively high discount rate over short horizons and a relatively low discount rate over long horizons" (Laibson 1997).We suggest two cognitive procedures where individuals perceive future utility as decreasing at a decreasing rate as a function of time.Such a perception is similar to hyperbolic discounting.The first procedure shows that individuals hyperbolically discount marginal utility from money when they follow a cognitive procedure in which they believe that their wealth might increase or decrease in each future period under the constraint of a perceived small probability that wealth will decrease below its current level.The second procedure shows that individuals hyperbolically discount expected utility from consumption when they believe that they will rationalize their actions and thus alter their utility function over time.The difference in how perceived utility changes over the short and long horizon generates the hyperbolic discounting phenomenon.We find that greater tendencies toward rationalization and greater volatility in consumption increase the hyperbolic discounting phenomenon. Although hyperbolic disc ounting is usually regarded as impulsive and irrational, Azfar (1999) and this author suggest that hyperbolic discounting may be rational in some cases.