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Book V, Chapter III: Underestimate of the Future - Eugen von Böhm-Bawerk, The Positive Theory of Capital 
The Positive Theory of Capital, trans. William A. Smart (London: Macmillan and Co., 1891).
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Book V, Chapter III
Underestimate of the Future
It is one of the most pregnant facts of experience that we attach a less importance to future pleasures and pains simply because they are future, and in the measure that they are future. Thus it is that, to goods which are destined to meet the wants of the future, we ascribe a value which is really less than the true intensity of their future marginal utility. We systematically underestimate future wants, and the goods which are to satisfy them.
Of the fact itself there can be no doubt; but, of course, in particular nations, at various stages of life, in different individuals, the phenomenon makes its appearance in very varying degree. We find it most frankly expressed in children and savages. With them the slightest enjoyment, if only it can be seized at the moment, outweighs the greatest and most lasting advantage. How many an Indian tribe, with careless greed, has sold the land of its fathers, the source of its maintenance, to the pale faces for a couple of casks of "firewater"! Unfortunately very much the same may be seen in our own highly civilised countries. The working man who drinks on Sunday the week's wage he gets on Saturday, and starves along with wife and child the next six days, is not far removed from the Indian. But, to a smaller extent, and in more refined form, the same phenomenon is, I venture to assert, not quite unknown to any of us, however prudent, or cultured, or highly principled. Which of us has not been surprised to find that, under the pressure of momentary appetite, he was not able to refuse some favourite dish or cigar which the doctor had forbidden—knowing perfectly that he was doing an injury to his health, which, calm consideration would tell him, was much more considerable than the pleasure of that trifling indulgence? Or, which of us has not, to avoid a little momentary embarrassment or annoyance, plunged headlong into a much greater? Who is there that has never postponed some troublesome but unavoidable call, or business, or work which had to be done within a certain time, till the day was past when it could be done with little trouble, and has had to do it in more difficult circumstances, in haste and hurry, with overexertion and ill-humour, to the displeasure of those who were injured or wounded by the delay? Any one who knows himself, and keeps his eyes open to what is going on around him, will find this fact of the underestimate of future pleasures and pains exhibited under a thousand forms in the midst of our civilised society.
Of the fact, then, there is no doubt. Why it should be so is more difficult to say. The entire psychological relations, indeed, through which future feelings in general act on our judgments and our actions, are still very obscure, and it will be understood that the same obscurity covers the reasons why future feelings act with greater weakness on our judgments and actions than present feelings. Without meaning to forestall the pronouncement of the psychologists, who seem to me more competent to decide on both questions than the economists, I venture to think that this phenomenon rests, not on one ground, but on the joint action of no less than three different grounds.
The first ground seems to me to be the incompleteness of the imaginations we form to ourselves of our future wants. Whether it be that our power of representation and abstraction is not strong enough, or whether it be that we will not take the necessary trouble, the consideration we give our future and, particularly, our far-away future wants, is more or less imperfect. Naturally, then, all those wants which we have not considered remain without influence on the valuation of such goods as are destined to serve those future wants, and, consequently, the marginal utility of such goods is put too low.
While this first ground is very much a peculiar defect in estimate, the second seems to me to rest on a defect in will. I believe it frequently occurs that a man, called on to make choice between a present and a future pleasure or pain, decides for the present pleasure although he knows perfectly, and is even conscious while choosing, that his future loss will outweigh his present gain, and that, taking his welfare as a whole, the choice is unprofitable. How well many a "good fellow" knows the painful embarrassments and privations he is bringing on himself, by running through his salary on the day he gets it, and yet has not the strength to resist the temptation of the moment! Or, how often does a man, "from weakness," let himself be hurried into taking some step, or making some promise, which he knows at the moment he will rue before twenty-four hours are over! The cause of such defects in conduct, I say, appears to me, in distinction from the former case, to rest, not on want of knowledge, but on defect of will. I should not be surprised, however, if the psychologists were to explain this case also as only a variation of the former: it may be that the weaker feeling of the moment prevails over the stronger feeling of the future only because the latter, while present in consciousness in a general way, is not lively enough and strong enough to take possession of the mind. For our purpose, however, it is a matter of no consequence.
Finally, as third ground, I am inclined to name the consideration of the shortness and uncertainty of life. In the case of future goods, their objective acquisition may be practically certain,12 and yet it is possible that we may not live to acquire them. This makes their utility a matter of uncertainty for us, and causes us—in perfect analogy with the case of objectively uncertain goods—to make a deduction from their value corresponding to the degree of uncertainty.13 A utility of 100, as to which there is 50% of probability that we shall not live to see it, we certainly do not value so highly as a present utility of 100; probably we value it as we do a present utility of 50; and I am convinced that any of us who was promised, to-day, a cheque for œ10,000 on his hundredth birthday, would be glad to exchange this large, but somewhat uncertain gift, for a very small sum in present money! To determine correctly the practical influence of this factor, however, we must make a somewhat more accurate calculation, both of the extent to which it prevails, and the way in which it works.
As regards this I think we shall be able to establish what follows. The factor in question is directly active only in a minority of cases: in most cases its action is indirect. It works in the most direct and powerful way in those not very numerous cases where men have the thought of death forced on them by peculiar circumstances; for example, among very old men, people suffering from fatal diseases, those placed in dangerous situations or engaged in very perilous callings, such as people in times of plague or soldiers before an engagement, and so on. The disregard of a future so uncertain not seldom finds drastic expression in the mad extravagance which seizes people in such circumstances; a fact in the history of civilisation which has often been noted—by Adam Smith among others. On the other hand, the thought of the uncertainty of life seems to me to exert no direct influence at all in that vast majority of cases where we are dealing with men in normal circumstances, and dealing, at the same time, with the valuation of goods belonging to a time not very far in the future; say, goods that would come into their possession in a couple of days, or months, or even years. I am convinced that a healthy middle-aged man, to whom a payment of œ100 next year was due for certain, would not value it a single penny less on the ground that he might not live to see next year. It is only where very long periods of time are concerned that this factor, among normally situated men, obtains fully and directly. Payments which fall due in a hundred, fifty, or even twenty years, lose in value from the consideration of the uncertainty of life as regards all payees: payments which fall due in ten years lose in value as regards a great many.
And here finally we have the point from which this third motive may rise to universal indirect efficiency—although, at the same time, a very much weakened efficiency. If certain differences of valuation have once become established as regards long intervals of time, they must, through the agency of exchange transactions, to some degree affect shorter intervals. For the mechanism which determines objective value abhors any sudden leap in value. It is not possible, for example, that a payment of œ100 which will be made on 1st January 1900 certain, should be worth only œ80 till 31st December 1889, and should jump up to the full value of œ100 at twelve oclock that night, because the due date is now only ten years off. Equalising tendencies, and transactions which I can best compare with stock exchange arbitrage, spread the differences of value, which obtain as regards long periods, uniformly over the entire intermediate period—Putting all these peculiar circumstances together, I should be inclined to consider the practical efficiency of this factor not altogether trifling. Still I should not place it very high, especially as it is weakened, to a not inconsiderable extent, by the consideration of closely related heirs. In any case, the two motives first mentioned have considerably more to do with the undervaluation of the future utility than the third.14 All three causes of our underestimate of future utility—errors of valuation through faulty representation of coming needs, defects of will, and consideration of the uncertainty of life—manifest themselves in extremely different degrees in different individuals, and even in the same individual at different times, according to differences of temperament and mood. For the same interval of time they may cause one to make an undervaluation of 100%, another of 50%, a third of 1% or 2%: while they may send fanatics in the matter of foresight and precaution to the opposite extreme of overvaluing future utility. I should like to call special attention, further, to the fact, that the undervaluation which results from these causes is not at all graduated harmoniously, in the subjective valuation of the individuals, according to the length of the time that intervenes. I mean, it is not graduated in this way, for example, that the man who discounts a utility which he expects to get in one year by 5%, must discount a utility due in two years by 10%, or one due in three months by 1¼%. On the contrary, the original subjective undervaluations are, in the highest degree, unequal and irregular. In particular, so far as the undervaluation is caused by defects of will, there may be a strong difference between an enjoyment which offers itself at the very moment, and one which does not; while, on the other hand, there may be a very small difference, or no difference at all, between an enjoyment which is pretty far away, and one which is farther away. Uniformity is practically introduced into the various undervaluations, as we shall see later, only through the mediation of exchange business. At any rate—and this is sufficient for us here—all three causes have one common result; that, under their influence, we estimate the utility of future goods at a lower figure than expresses their true value: we look at the marginal utility of future goods diminished, as it were, in perspective.15
Now it is easy to show that this phenomenon must substantially contribute to strengthen the efficiency of the first factor in the undervaluation of future goods, the difference in the provision of goods for present and future. All persons who are worse off in the present than they expect to be in the future,—persons to whom, therefore, the true marginal utility of a future good is already less than the marginal utility of a similar present good,—are led by this second factor to put the future marginal utility still lower than it really is, and this increases the difference in value to the further prejudice of future goods. If, for example, the marginal utility of a definite present good is 100, and the true marginal utility of a similar good in a better-provided future is 80, the future good will be rated, perhaps, at 70 only, thanks to this second factor, and thus the difference of valuation rises from 20 to 30. In the same way those persons who may be supposed to be in approximately similar circumstances in present and future, and would, other things being equal, value present and future goods at approximately the same figure, will fall under the category of those who value present goods more highly than future. This second factor, then, increases both the number and the intensity of the differences in valuation to the prejudice of future goods, and, naturally, in the market where present goods are exchanged against future, this must make the resultant exchange value more unfavourable to the latter. The agio on present goods moves upwards.16
[12.]See above, p. 245.
[13.]If there is objective uncertainty as well as subjective there will, naturally, be two deductions. Of these the one made on account of objective uncertainty, as a particular phenomenon of certain kinds of goods, has nothing to do with interest; we have only to deal with the deduction on account of subjective uncertainty.
[14.]An effect analogous to that of the uncertainty of life might be exerted by the uncertainty of the duration of our capacity of enjoyment; but in any case the limits of the efficiency of this motive are much more closely drawn.
[15.]Jevons, like his follower Sax, as we saw in the note to p. 239, fell into a misunderstanding as to the entire nature of the phenomenon mentioned in the text, in confusing the representations and valuations which we make as regards future feelings with actually present feelings. We need not wonder, then, at not finding in these writers any sound thorough-going explanation of the phenomena, or even an attempt at such. They accept the supposed "weakened anticipated feelings" of future needs simply as fact, as a " well-known psychological fact," and they pass over much of its detail—which really very much requires explanation—without comment as "self-evident" (see e.g., Sax as before, p. 178).
[16.]Indirectly this effect will be strengthened by the fact that, through the under-valuation of the future utility, men will refrain from providing for the future so amply as they would otherwise have done. In other words, this underestimate acts to the prejudice of saving and accumulation of wealth, and still further reduces the number of persons who have to throw an accumulated surplus of present goods on the market.