The problem of hyperbolic discounting

Abstract

In the standard theory of human decision making a rational agent faced with a set of options chooses an option that maximizes the total value of expected consequences. This theory introduces a number of characteristic variables: a set of options, a set of possible consequences of each option, and a measure of value, probability, and futurity for each possible consequence given that a particular option is chosen. A widely discussed question is whether the value attributed to any consequence does, or should, depend on its futurity. Observed behaviour appears to show that attributed value commonly decreases with futurity. There is an argument that this discounting is rational provided that it leaves the relative preference order among options unchanged as alternative consequences approach. But research in behavioural economics provides apparently compelling evidence that observed human decision making frequently exhibits a form of discounting – hyperbolic discounting – that violates this condition. If the inference is correct it appears to deprive the standard theory of its usually assumed explanatory merit.

On examination, this conclusion rests on a number of questionable assumptions. In this thesis I examine these assumptions and provide an alternative analysis of the process of rational decision making in terms of its adaptive basis and procedural constraints. I investigate, in particular, the causal structure of agency and associated issues of valuation, option definition, and probability assignment including, inter alia, the role of predictive accuracy, the combinatorial structure of valuation, proxies, the variety of alternatives, achievability, and the reference class problem. I derive a principle theory of rational decision making that generates a number of characteristic dynamical value profiles in response to various typically prevailing conditions. They exhibit exponential, hyperbolic, and other characteristic second order effects. I discuss issues of rational evaluation, amendment, testing, and wider philosophical implications.

Date of Award	22 Mar 2022
Original language	English
Awarding Institution	University of Bristol
Supervisor	James A C Ladyman (Supervisor) & Samir Okasha (Supervisor)