Rule-Rationality and the Evolutionary Foundations of Hyperbolic Discounting

Hillel Bavli

Recent studies involving intertemporal choice have prompted many economists to abandon the classical exponential discount utility function in favor of one characterized by hyperbolic discounting. Hyperbolic discounting, however, implies a reversal of preferences over time that is often described as dynamically inconsistent and ultimately irrational. We analyze hyperbolic discounting and its characteristic preference reversal in the context of rule-rationality, an evolutionary approach to rationality that proposes that people do not maximize utility in each of their acts; rather, they adopt rules of behavior that maximize utility in the aggregate, over all decisions to which an adopted rule applies. In this sense, people maximize over rules rather than acts. Rule-rationality provides a framework through which we may examine the rational basis for hyperbolic discounting in fundamental terms, and in terms of its evolutionary foundations. We conclude that although aspects of hyperbolic discounting may contain a certain destructive potential, it is likely that its evolutionary foundations are sound -- and its application may well be as justified and rational today as it was for our foraging ancestors.

June, 2009
Published in: