Hyperbolic Utility Functions

Economists think people discount the future in an excessive and inconsistent way. This discounting can be described using hyperbolic utility functions. While this type of discounting are considered by economists as irrational to some extent, we can find its rational reason.

When our ancestors lived in savanna, a lot of uncertainties prevailed. They didn't even know whether they could survive today. In that situation of high uncertainty, it is actually better to place much more emphasis to the consumption in current time and in the near future: compared to $100 one year from now, you may prefer $10 tomorrow, because you don't know whether you can survive to next year. Having a good meal today with a possibility of starvation tomorrow may not be a bad choice given that the meal gives you strength to protect yourself and improve your chance of survival and finding more food tomorrow. Storing too much food doesn't help that much if you may get attacked by wild animals or raided by people from other tribes tomorrow, and lost everything you have. The motto of our ancestors may be: let tomorrow take care of itself.

To make the point, what has been described is an exaggeration. Of course, our ancestors were not that shortsighted. They do plan and care for tomorrow. But the point is when high uncertainty is a rule rather than an exception, you don't want to plan too much in the future, and hence we discount the future to an excessive  extent.

This is rational. Well, it is rational in the savanna time. For now? Not that rational any more. Now we live in a world with affluent resources and much higher safety. Now it pays to be far-sighted and patient. It pays to invest into the future. We see that nowadays successful people usually display a trait of patience. But most, if not all, of us have the genes that make us tend to excessively discount that we have inherited from our ancestors. The way successful people succeed is to use their mind and willpower to overcome their tendency  to be shortsighted.

This may be one reason that people consider patience as a virtue: it is indispensable for success, while our nature prescribes that we act impatiently. You may wonder: can we one day overcome our nature? There is a possibility, though not very likely, in the future. We know that patient people have evolutionary advantage over those who are impatient, and patient people tend to be more successful and get more resources, creating better environment for offspring to pass on their patient genes. But unlike other primates, human beings are more civilized and empathetic. The most successful "alpha male" in the society will not, fortunately, dominate other males and get all the mates. Even though the patient genes have their advantage, but the advantage is not obvious and all the impatient genes have their change to pass on. Moreover, even if the patient genes have salient advantage, it takes thousands, if not millions, of years for evolution to select advantageous genes. Therefore, even though there is a possibility that we would change our impatient nature, it would happen at a time that you  have long gone from this world. Sadly.

But why do we care, we short-sighted?




Nature to be commanded must be obeyed.