What is the role of discounting in game theory and how does it affect intertemporal decision-making?

What is the role of discounting in game theory and how does it affect intertemporal decision-making?

Discounting plays a crucial role in game theory by incorporating the concept of time preference into intertemporal decision-making. It refers to the process of assigning lower value to future outcomes compared to immediate ones. In game theory, discounting is used to model the behavior of individuals who prioritize immediate gains over long-term benefits.

Discounting affects intertemporal decision-making by influencing the trade-off between present and future payoffs. Individuals with a higher discount rate tend to place greater importance on immediate rewards, leading to more impulsive decision-making. On the other hand, individuals with a lower discount rate are more patient and willing to delay gratification for higher future payoffs.

In game theory, discounting can impact the strategies chosen by players in sequential games. It can influence the timing of decisions, the willingness to cooperate, and the overall outcome of the game. For example, a player with a high discount rate may be more likely to defect in a repeated prisoner's dilemma game, as they prioritize short-term gains over long-term cooperation.

Overall, discounting in game theory reflects the inherent time preferences of individuals and has a significant impact on intertemporal decision-making and strategic behavior.