Patient Decision Making: Exponential versus Hyperbolic Discounting

Abstract

Evidence strongly indicates that human decision makers discount the future using a hyperbolic function instead of following an exponential, which has been the long‐standing assumption. We compare the exponential and hyperbolic models in evaluation of a simple research and development project selection problem, finding that the exponential function favors short‐term choices, while the hyperbolic function favors the long‐term. We demonstrate applications of the hyperbolic function, concluding that the traditional exponential—which does not faithfully represent typical human preferences—leads toward myopic decision making when compared to the hyperbolic. Copyright © 2012 John Wiley & Sons, Ltd.

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