Discounting

Preferences for Early versus Late Rewards

The question as to why money, goods, services, and health are more desirable in the present than in the future has been answered in several ways. Money and some goods can increase in value with time, so that it is better to obtain them in the present to obtain future growth. Having $100 now allows one to invest it and accrue interest over time. Waiting a year to receive $100 means that a year of interest is lost. Also, waiting for a reward may increase the risk of losing it in the future, so it [Page 392]is better to have it in the present. For example, a person may choose to spend money on a vacation this year over investing in a retirement fund that would allow a vacation in the future. Waiting introduces the risk that one may not be healthy enough to enjoy a vacation during retirement. In medical decision making, the concept of discounting provides a way to understand why people engage in behaviors, such as smoking, that provide immediate gratification but that may contribute to risks to health in the future.

Discounting in Health and Medicine

Consideration of the value of health outcomes over time is critical to decision analysis and in analyses of the costs and benefits of preventive health regimens, diagnostic tests, and medical treatments. The results of decision analyses and cost-and-benefit analyses are important considerations in the development of policy on healthcare. In these types of analyses, discounting rates are used to provide an adjustment of the present value of an outcome for the costs and benefits occurring at different time points. While a variety of discounting rates have been used in these studies to estimate the value of future outcomes, the U.S. Preventive Service Task Force suggests the use of a 3% discount rate for cost-and-benefit analyses with a rate of 5% used for sensitivity analyses. However, discount rates have been shown to vary in studies of time preferences, and higher rates of 40% and 50% have been observed. The selection of discount rates for decision and economic analyses should depend on whether the interest is in group preferences or individual preferences. The lower rates may be reasonable to use for group analyses, but the higher rates may be appropriate to examine individual preferences.

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