Patient Decision Making: Exponential versus Hyperbolic Discounting

Evidence strongly indicates that human decision makers discount the future using a hyperbolic function instead of following an exponential, which has been the long-standing assumption. We compare the exponential and hyperbolic models in evaluation of a simple research and development project selection problem, finding that the exponential function favors short-term choices, while the hyperbolic function favors the long-term. We demonstrate applications of the hyperbolic function, concluding that the traditional exponential—which does not faithfully represent typical human preferences—leads toward myopic decision making when compared to the hyperbolic.