Consumption and Risk with Hyperbolic Discounting

　　To what extent does hyperbolic discounting leave the canonical model of consumption and portfolio choice intact? Palacios-Huerta (2002) has recently incorporated hyperbolic discounting into Merton’s (1969, 1971, 1994) continuous-time model of consumption and portfolio choice with CRRA preferences. We employ his model to clarify how hyperbolic discounting alters the standard model.  It is true that the level of consumption under hyperbolic discounting is observationally equivalent to the level of consumption under exponential discounting, but with a higher discount rate.  However, hyperbolic discounting also introduces a non-linearity into the consumption function which produces strikingly different comparative statics than the standard model. Hyperbolic discounting makes consumption a concave function of risk.