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Goods are present at particular times: for instance, we can do work that will improve health now, or we can do it in the future.

People often think that we should value goods in the future less than goods now. There are a variety of different reasons why we might discount the future: for instance, we might simply care less about the future than we do the present (this is known as pure time preference). Alternately, we might care just as much about my future, but think that there is some probability that it will not be possible to reap the benefits at that time (for instance, I might care less about my personal income in 40 years, simply because there’s a reasonable chance that I will be dead by then, and not able to enjoy the income). A variety of 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 particularly 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 led some to focus on issues relating to the long-run future.

Further reading

Cotton-Barratt, Owen. 2016. Discounting for uncertainty in health.

Ord & Wiblin. 2016. Should we discount future health benefits when considering cost-effectiveness?.
Debate from researchers in the community.

Wikipedia. 2016. Annual effective discount rate.
The most common example is capital, which is normally discounted to account for the fact that if money is spent later, it can accumulate interest.

Wikipedia. 2016. Social discount rate.
A related concept in social decision making.