David Laibson Talk

Dr. David Laibson 

Harvard University 

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.