Reconciling Exponential and Hyperbolic Discounting

Experimentalists researching individual time-preference behavior report that hyperbolic discounting explains their results better than exponential discounting. Financial institutions almost exclusively employ exponential discounting, so these results expose a rift in thought between financial institutions and their clients. This article employs the concept of duality to argue that the rift is more apparent than real. Every conventional, discounting equation possesses a dual version, each dual containing every interest rate solving its conventional counterpart. Unlike conventional equations, duals are linear in the interest rate variable, in line with lay intuition. In simple, two-valued situations, the exponential dual is like the hyperbolic equation, rendering ambiguous the results of many past experiments. In more complicated, multi-valued situations, both duals are seemingly identical, making it unlikely that more complicated experiments can discriminate between the two discounting methods