Hyperbolic discounting in the absence of credibility
Hyperbolic discounting behaviour can arise in experiments when expected utility maximising subjects who discount exponentially doubt the credibility of future pay-offs.
In this paper the authors show theoretically that lack of credibility introduces a present bias, as subjects internalise the uncertainty. Hence, experiments that do not ensure credibility may erroneously conclude that observed behaviour is driven by hyperbolic pure time preferences, rather than the rational response to non-credible payoffs.
The findings are important as they indicate that some caution is warranted in the interpretation of previous empirical results. The theory developed by the authors uncovers a potential source of the extent to which hyperbolic discounting might have been exaggerated in experimental work in which payoffs lacked credibility, due to the delivery mechanism, lab reputation or their hypothetical nature. The theory speaks directly to the quest for inter-temporal choice models which take into account subjects’ time horizon-sensitivity in discounting observed in experiments.
Future experimental work could quantify the extent to which credibility can affect discounting, and isolate how individuals construct their priors when credibility is lacking. Until then, this paper simply highlights the importance of gauging and ensuring reliability and credibility in the lab and field.