First, you can empirically observe real-life discount functions that you can, ahem, bet money on. For example, here.
Second, with respect to “my intuition is not to discount at all”, let’s try this. I assume you have some income that you live on. How much money would you take at the end of three months to not receive any income at all for those three months? Adjust the time scale if you wish.
In general, you can think of discounting in terms of loans. Assuming no risk of default, what is the interest rate you would require to lend money to someone for a particular term?
Second, with respect to “my intuition is not to discount at all”, let’s try this. I assume you have some income that you live on. How much money would you take at the end of three months to not receive any income at all for those three months? Adjust the time scale if you wish.
If I received an amount equal to the income I would have gotten normally, then I have no preference over which option occurs. This still assumes that I have enough savings to live from, the offer is credible, there are no opportunity costs I’m losing, no effort is required on my part, etc.
In general, you can think of discounting in terms of loans. Assuming no risk of default, what is the interest rate you would require to lend money to someone for a particular term?
This is the same question, unless I misunderstood. I do have a motivation to earn money, so practically I might want to increase the rate, but I have no preference between not loaning and a rate that will put me in the same place after repayment. With my assumptions, the rate would be zero, but it could increase to compensate—if there’s an opportunity cost of X, I’d want to get X more on repayment, etc.
This still assumes that I have enough savings to live from
No, it does NOT assume that.
Basically you have a zero discount rate for money which you don’t need at the moment. How about money which you can use and want to use today, what rate will persuade you to go without?
That assumption is to make time the only difference between the situations, because the point is that the total amount of utility over my life stays constant. If I lose utility during the time of the agreement, then I would accept a rate that earns me back an amount equal to the value I lost. But if I only “want” to use it today and I could use it to get an equal amount of utility in 3 months, then I don’t have a preference.
because the point is that the total amount of utility over my life stays constant.
I don’t think this is a useful approach. A major component of time preference is the fact that future is uncertain.
If you set up the situation such that there is basically no difference between the future and the present (both are certain, known, you yourself don’t change, etc.) then yes, reshuffling utility between two otherwise identical points on a timeline is something you could well be indifferent to. However that’s very far away from the real life and I thought we were talking about something with practical applications rather than idealized abstractions.
It actually does have practical applications for me, because it will be part of my calculations. I don’t know whether I should have any preference for the distribution of utility over my lifetime at all, before I consider things like uncertainty and opportunity cost. Does this mean you would say the answer is no?
I would say that before your current needs, uncertainty, opportunity cost, and changes in yourself the answer is debatable, that is, I can see it coming down to individual preferences.
But I still don’t see practical applications. For actual calculations you need some reasonable numbers and I don’t see how you are going to come up with them.
Couple of things to throw in there.
First, you can empirically observe real-life discount functions that you can, ahem, bet money on. For example, here.
Second, with respect to “my intuition is not to discount at all”, let’s try this. I assume you have some income that you live on. How much money would you take at the end of three months to not receive any income at all for those three months? Adjust the time scale if you wish.
In general, you can think of discounting in terms of loans. Assuming no risk of default, what is the interest rate you would require to lend money to someone for a particular term?
If I received an amount equal to the income I would have gotten normally, then I have no preference over which option occurs. This still assumes that I have enough savings to live from, the offer is credible, there are no opportunity costs I’m losing, no effort is required on my part, etc.
This is the same question, unless I misunderstood. I do have a motivation to earn money, so practically I might want to increase the rate, but I have no preference between not loaning and a rate that will put me in the same place after repayment. With my assumptions, the rate would be zero, but it could increase to compensate—if there’s an opportunity cost of X, I’d want to get X more on repayment, etc.
No, it does NOT assume that.
Basically you have a zero discount rate for money which you don’t need at the moment. How about money which you can use and want to use today, what rate will persuade you to go without?
That assumption is to make time the only difference between the situations, because the point is that the total amount of utility over my life stays constant. If I lose utility during the time of the agreement, then I would accept a rate that earns me back an amount equal to the value I lost. But if I only “want” to use it today and I could use it to get an equal amount of utility in 3 months, then I don’t have a preference.
I don’t think this is a useful approach. A major component of time preference is the fact that future is uncertain.
If you set up the situation such that there is basically no difference between the future and the present (both are certain, known, you yourself don’t change, etc.) then yes, reshuffling utility between two otherwise identical points on a timeline is something you could well be indifferent to. However that’s very far away from the real life and I thought we were talking about something with practical applications rather than idealized abstractions.
It actually does have practical applications for me, because it will be part of my calculations. I don’t know whether I should have any preference for the distribution of utility over my lifetime at all, before I consider things like uncertainty and opportunity cost. Does this mean you would say the answer is no?
I would say that before your current needs, uncertainty, opportunity cost, and changes in yourself the answer is debatable, that is, I can see it coming down to individual preferences.
But I still don’t see practical applications. For actual calculations you need some reasonable numbers and I don’t see how you are going to come up with them.