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Temporal discounting (also called time discounting) is the discounting of the value of a good the further into the future it is expected to be realized.

People often think that we should value goods in the future less than goods now. We might discount the future for various reasons. For instance, we might simply care less about the future than about the present (this is known as pure time preference). Alternately, we might care just as much about the future but think there is some probability that it will not come about. Someone may, for instance, care less about their income in 40 years because there's a reasonable chance that they will be dead by then. Various other reasons might apply, depending on the good under discussion.

A discount function shows how the value of a good decreases if it occurs at different times. A common form of discount function is exponential. In this case, the discount rate (in annualized form) is the percentage decrease in the value of a good, one year into the future, compared to now. So if you value a sweet in a year 20% less than having a sweet now, you are using a discount rate of 20%.

It is generally thought that different discount functions should be used for different goods. This is because the reasons to discount apply to different extents for different goods. For instance, I might apply a lower discount rate for helping others than I do for myself, because it's more likely that (some) other people will be around in 60 years time than it is that I will still be alive in 60 years time.

Members of the effective altruism community have often argued against pure time discounting, and so for lower discounting of future welfare. This has contributed to some people focusing on issues relating to the long-run future.


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Posts tagged Temporal discounting