OBJECTIVES: Economists universally discount future benefits and costs using standard compound discounting formulas with constant annual discount rates. Considerable evidence shows that humans value time using hyperbolic discounting, where annual discount rates decline over greater time horizons. This presentation explores the importance of choosing the right discount formula (compound vs. hyperbolic) for health economics analyses and simulations.

METHODS: This analysis reinterprets discounting as the marginal utility of life expectancy or the arrival of a deadline, treating time as a depleting asset. In this approach, standard discounting is mathematically equivalent to stating that the value of time follows standard exponential utility, with constant absolute risk aversion. Alternative utility functions to express the utility of time are presented, and methods to choose among them are explored.

RESULTS: Widespread evidence, including animal, economics, behavioral psychology, and even fMRI brain studies, shows that actual time preferences are “hyperbolic, After briefly reviewing this literature, I will presume that hyperbolic discounting represents people’s time preferences better than standard compound discounting, and will assess the consequences of continued use of incorrect current discounting formulas and methods. Incorrectly using exponential discounting overly-favors short-term projects and harm longer-term projects. This affects investments in environmental policy (including climate change), biomedical research funding and public education, all of which affect people’s health. The “discount function” affects numerous health economics area, including: (1) How we discount future benefits and costs in cost-effectiveness and cost-benefit analyses; (2) How we translate the Value of a Statistical Life (VSL), e.g., $5 million per VSL, into the Value of a Statistical Life Year (VSLY), e.g., $100,000 per QALY, which informs decisions about cost-effectiveness decision thresholds (maximum willingness to pay for health gains; (3) The proper discounting function to estimate the value of extensions in life expectancy.

CONCLUSIONS: Using improper discounting formulas jeopardizes the validity of cost-effectiveness and health economics studies.