Thinking and Deciding

482 DECISIONS ABOUT THE FUTURE
that you value the future as much as the present. It does imply, however, that if you
value the future less than the present, you do it in a consistent way. Such consistency
can be shown to imply (barring special events) that in each unit of time (into the
future) the value of a reward will fall off by a constant percentage of its value at the
beginning of the interval (Lancaster, 1963; Strotz, 1955). 6
For the time being, however, let us assume that one ought to be impartial toward
all times of one’s life. If we think of people at different times as though they were
different people, this amounts to the assumption made by utilitarianism that everyone
should be treated equally. (Note that when we apply utilitarianism to decisions about
others, we ought to consider their future preferences as equal in importance to their
present preferences. This often gives us a strong moral reason to go against what
people say they want when they do not think enough about their own future.) This
assumption of impartiality still implies (except when there are special circumstances)
a discount function like that shown earlier, in which the rate of loss with increasing
delay is constant as a percentage.
Descriptive data on discounting
People often discount too much (relative to the standard of impartiality just described),
and they are dynamically inconsistent. These two results may be related.
Other results have been found repeatedly.
The subjective discount rate
How do individuals discount money? Some economists (for example, Modigliani,
1986) have suggested that the discount rate for money corresponds roughly to the actual
rate of interest and that most people try to spread out their income over their lives
so as to achieve a constant income (adjusted for inflation). The fact that many people
put their money in pension funds and other methods of saving is surely consistent
with this view. Pension funds ensure a relatively constant income after retirement;
failure to save for retirement is surely an example of underweighing the future, unless
one knows that one will never retire. By this view, people care as much about
their future as about their present.
Thaler and Shefrin (1981) have argued, however, that such saving is not spontaneous.
It is, rather, the result of conscious efforts at self-control. When such efforts
are absent — when people do not think about the idea of saving, for example —
Thaler and Shefrin found that consumers had an extremely high discount rate —
much higher than the current rate of interest. When subjects in an income maintenance
experiment were asked, “What size bonus would you demand today rather
than collect a bonus of $100 in one year?,” answers indicated subjective discount
rates of between 36% and 122%, far higher than the highest interest rate charged at
this time.
6 That is, it will decay exponentially.