Alexander Adamou and Yonatan Berman and Diomides Mavroyiannis and Ole Peters (2019). Microfoundations of Discounting. RESEARCHERS.ONE, https://www.researchers.one/article/2019-10-7.

An important question in economics is how people choose between different payments in the future. The classical normative model predicts that a decision maker discounts a later payment relative to an earlier one by an exponential function of the time between them. Descriptive models use non-exponential functions to fit observed behavioral phenomena, such as preference reversal. Here we propose a model of discounting, consistent with standard axioms of choice, in which decision makers maximize the growth rate of their wealth. Four specifications of the model produce four forms of discounting - no discounting, exponential, hyperbolic, and a hybrid of exponential and hyperbolic - two of which predict preference reversal. Our model requires no assumption of behavioral bias or payment risk.

nobody noone

October 10, 2019 6:20 am

I think eq 3.7 and 3.8 have a minor typo in the denom. exp(r * (H + D)) instead of exp(r D) or something like that. 3.22 is correct.

October 11, 2019 8:05 am

You are right, many thanks! The article has been updated. Best wishes, Alex