Dr. David Laibson
Myopia and Discounting
For the last century, economists have assumed that agents have `deep' time preferences -- in other words, agents value pleasures and pains in t years more than pleasures and pains in t+1 years. By contrast, philosophers have argued that discounting future rewards results from ``myopia,’’ i.e. imperfect foresight. We develop this alternative hypothesis. Specifically, we show that time discounting arises naturally when a perfectly patient Bayesian decision-maker receives noisy signals about the future (instead of being able to make noiseless forecasts). The resulting signal-noise extraction problem leads the Bayesian agent to effectively down-weight delayed utils. Our benchmark model of imperfect forecasting implies that agents act `as if' they have hyperbolic time preferences, including exhibiting systematic preference reversals. However, our model implies that agents do not choose commitment -- their deep time preferences are dynamically consistent. Our model also implies that agents with more experience/intelligence will behavior more patiently.