Patient Decision Making: Exponential versus Hyperbolic Discounting

Authors


Operations and Strategic Management Department, Carroll School of Management, Boston College, Fulton Hall 354, 140 Commonwealth Ave. Chestnut Hill, MA 02467, USA. E-mail: graves@bc.edu

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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