Thinking and Deciding

480 DECISIONS ABOUT THE FUTURE
This is because the theory assumes that a third option is available, which is to
invest the money, take out your investment in fifteen years (when it would double if
the real interest rate were about 5%), and spend it on saving species then. If the cost
of saving species has not gone up — and there is no more reason to think it will go
one way than the other — then you can do more good with this investment option.
The decision to invest will repeat itself. When fifteen years are up, you would be
faced with the same choice. If you do not discount future benefits (by at least 50%
in fifteen years, in this example), you would put off spending the money forever.
The only way to avoid perpetual procrastination is to discount the future benefits,
enough so that you actually decide to plunk down some money now. Notice that I
have not assumed that you care less about future species. The discounting of benefits
is necessary because you are trading this off with money; you are asking about the
value of saving species in monetary terms. Future species are worth less money,
although they may not have less utility for us.
This argument depends on interest being paid on investments. Why is interest
paid? First, to make up for uncertainty about getting your money back. That is not
at issue in these arguments. Second, inflation. But the theory so far works just as
well with no inflation. It could be stated in “constant dollars,” adjusted for inflation.
Third, investments are often worthwhile: By digging a well, you can get more water,
more cheaply, than by relying on rain, so investment in the well is worthwhile in
the long run. The demand for money for such investments allows investors to get
interest.
Two other reasons are more interesting. One is that, psychologically, people are
impatient. They favor the present even beyond their concerns about uncertainty or
inflation. So, if you want people to lend you money, you have to pay them extra in
order to compensate them for delaying the gratification of their desires for immediate
reward. Economists call this “pure time preference.”
The second reason has to do with declining marginal utility (Chapter 10). The
standard of living has been steadily increasing throughout human history. If we
assume that this will continue, then people in the future will get less utility from
money than people in the present. This is completely analogous to the reasons why
the rich should help the poor. But we are the relatively poor! And we are making the
decisions to soak the rich who will follow us. Strange but, according to the theory,
true.
The relative importance of these various justifications for interest is a matter of
debate among economists.
Normative theory of discounting
There are good economic reasons to think that this form of the decay curve — of
utility as a function of delay — is normative, as long as there is no known reason
why the utility of the reward will change. 4 One is the idea of interest rate, already
4For example, the utility of a car increases when the owner can obtain a driver’s license. Here, we put
such predictable changes aside.