Interest Rates, Discount Rates, and the Net Present Value of Things

Feb 22, 2016
IanRunge
0

Why do we use exponential discounting to bring future valuation into the present?

George Ainslie reckons that as individual decision-makers we do not discount the future according to some exponential curve, but instead apply an hyperbolic function.

What this effectively means is that:

Individuals effectively value future events much less than traditional formulas suggest, and
The realisation of value (in the mind of the decision-maker), rather than changing steadily through time actually changes dramatically as the event in question comes closer to reality.

Ainslie is a serious researcher. He provides convincing support for his case. In my book Capital and Uncertainty I examine his findings and demonstrate further support for the proposition. There are important implications for entrepreneurship and large decision-making.

(Article originally mentioned in the Capital Strategy Newsletter #2002/01)