Asset Prices and Hyperbolic Discounting

Liutang Gong

William Smith

and

Heng-fu Zou

This paper explores the implications of hyperbolic discounting for asset
prices and rates of return. Hyperbolic discounting has no effect on the equity premium. However, by making people less patient, causes stock prices to be lower, and interest rates higher, than with exponential discounting. In addition, hyperbolic discounting dampens the marginal effect of risk on stock prices, relative to the exponential case.