NOTES ON DISCOUNTING

TLDR

Discount functions model how a variable can be expressed in terms of its own maximum value, and in psychology delay, probability, memory, and economic utility are commonly represented as hyperbolic discounting processes. A power‑function form of the discount variable yields a superior fit to delay, probability, and memory discounting data, consistent with the generalized matching law and a constant‑elasticity‑of‑substitution utility maximization.

Abstract

In general, if a variable can be expressed as a function of its own maximum value, that function may be called a discount function. Delay discounting and probability discounting are commonly studied in psychology, but memory, matching, and economic utility also may be viewed as discounting processes. When they are so viewed, the discount function obtained is hyperbolic in form. In some cases the effective discounting variable is proportional to the physical variable on which it is based. For example, in delay discounting, the physical variable, delay ( D ), may enter into the hyperbolic equation as kD . In many cases, however, the discounting data are not well described with a single‐parameter discount function. A much better fit is obtained when the effective variable is a power function of the physical variable ( kD s in the case of delay discounting). This power‐function form fits the data of delay, probability, and memory discounting as well as other two‐parameter discount functions and is consistent with both the generalized matching law and maximization of a constant‐elasticity‐of‐substitution utility function.