How would interest rates be different if we all "aged" like Benjamin Button? The movie made me wonder if consumption and youth might be complements--would you rather have the red convertible at 56 or 16? Would rates be different still if our minds (and not just bodies, as in the movie) aged in reverse? For example, we seem to get more risk averse as we grow older.
Random Economic Thought of the Day
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Authors
- Richard W. Evans is an Assistant Professor of Economics at Brigham Young University
- Jason DeBacker is a Washington, D.C. economist.
I think I discount the future less as time goes on (right now) but I’m sure I’ll start discounting it more as I get closer to the end of my life. Or maybe I am just becoming more risk averse as I get more experience and information. I think it is a well established fact in the literature that you can’t uniquely identify whether behavior is coming from risk aversion or non-exponential (hyperbolic) discounting. They both do the same thing to consumption and intertemporal substitution.
Anecdotal note: I'll always remember when talking about climate change models, Dr. Kendrick saying that throughout his life he didn't give discounting the proper due. Then, once he had grandchildren, it became very, very important to him.
I wonder how Greg Oden feels about this.
Hmmm- I wasn't really familiar with that well established fact. Clearly, one could have have a model with exponential or hyperbolic discounting that implies the same interest rate, but is seems like you would be able to identify between the two models using more detailed behavior. For example, do people exhibit time inconsistent behavior? Or one could use the data to separate out risk aversion from the rate of time preference (most models with non-Epstein-Zin preferences conflate the two).