Past and Future: Backward and Forward Discounting

Abstract

We study a model of time preference in which both current consumption and the memory of past consumption enter “experienced utility”—or the felicity—of an individual. An individual derives overall utility from her own felicity and the anticipated felicities of future selves. These postulates permit an agent to anticipate future regret in current decisions, and generate a set of novel testable implications in line with empirical evidence. The model can be applied to disparate phenomena, including present bias, equilibrium savings behavior, anticipation of regret, and career concerns.