In economics, time preference (or time discounting , [1] delay discounting , temporal discounting ) [2] is the current relative valuation Placed on receiving send a good at an Earlier Date Compared with receiving send it at a later date. [3]

There is no absolute distinction that separates “high” and “low” time preference, only comparisons with either individually or in aggregate. Someone with a high-preference is referred to as a “good-looking” person.

Time preferences are capturing mathematically in the discount function . The higher the time preference, the higher the discount on the future.

The time preference is an individual exhibits at any given moment is determined solely by their personal preferences . As such, if one “prefers” to save his money but can not do so in the present, he is still considered to have a low-time preference. One of the factors that determines an individual’s time preference is how long that individual has lived. An older person may have a lower income preference (relative to what he has earlier in life) due to a higher income and to the fact that he has more time to acquire durable commodities.

The time preference is an attempt to explain the interest in the demand for accelerated satisfaction. This is particularly important in microeconomics .

In the neoclassical theory of interest due to Irving Fisher , the interest rate determines the relative price of present and future consumption. Time preference, in conjunction with relative levels of present and future consumption, determines the marginal rate of substitution between present and future consumption. These two rates must necessarily be equal, and this equilibrium is brought about by the relative prices of present and future consumption.

A practical example is Jim and Bob go out for a drink and Jim has no money so Bob lends Jim $ 10. The next day Bob comes back to Jim, and Jim says, “Bob, you can have $ 10 now, or at the end of the month when I get paid I will give you $ 15.” Bob’s time preference would change depending on whether he trusted Jim and how much he needed the money now, thinks he could wait, or would prefer to have $ 15 at the end of the month than $ 10 now. Present and expected needs, present and expected income.

Neoclassical views

In neoclassical economics , the rate of time preference is usually taken as a parameter in an individual’s utility function which captures the trade off between consumption and consumption in the future, and is thus exogenous and subjective. It is also the underlying determinant of the real rate of interest. The rate of return on investment is calculated as follows: Arbitrage, in turn, implies that the return on capital is equalized with the interest rate on financial assets (adjusting for such factors as inflation and risk). Consumers, who are facing a choice between consumption and saving, (Impatience) and increase or decrease their current consumption according to this difference. The Ramsey growth model .

In the long run steady state, the consumption of the capital is adjusted to ensure that the equality holds. It is important to note that in this view, it is not that people discount the future because they can receive positive interest rates on their savings. Rather, the causality goes in the opposite direction; Impatient individuals to forgo current consumptions in favor of future.

Austrian School views

In His book Capital and Interest , the Austrian economist Eugen von Böhm-Bawerk built upon the time-preference ideas of Carl Menger , insisting That There is always a difference in value entre present goods and future goods of equal quality, quantity, and form. Moreover, the value of future goods diminishes as the length of time necessary for their completion increases.

Böhm-Bawerk cited three reasons for this difference in value. First of all, in a growing economy, the supply of goods will always be in the future. Secondly, people have a tendency to underestimate their future needs due to carelessness and shortsightedness. Finally, entrepreneurs would rather initiate production with goods presently available, instead of waiting for future goods and delaying production.

By contrast, George Reisman says that time preference arises because of the possibility of being incapable or totally incapable (through substantial incapacity or death) to enjoy the use of goods in the future. [4] The most important thing to consider is that you have to be a member of a group. The root of time-preference in Reisman’s view is an internal risk premium which is specific to the owner of the goods, in contrast to an external risk premiumthat is demanded when the owner invests them in a production process or lends them to another.

In Human Action (chapter 18), Ludwig von Mises discusses time inconsistency: that sooner-occurring future intervals are valued more highly than later-occurring future intervals. [5] This observation has been observed in behavioral economics. Citation needed ]

Temporal discounting

Temporal discounting (Also Known As delay discounting , time discounting ) [6] is the tendency of people to discount rewards As They approach a temporal horizon in the future or the past (ie, Become remote so in Time That They cease to be valuable gold To have additive effects). To put it another way, it is a tendency to give away the value to rewards as they move away from their temporal horizons and towards the “now”. For instance, a nicotine deprived smoker may highly value a cigarette available any time in the next 6 hours but not a cigarette available in 6 months. [7]

Regarding terminology, from Frederick et al (2002):

We distinguish time discounting from time preference . We use the term time discounting to encompass any reason for caring less about a future consequence, including factors that diminish the expected utility generated by a future consequence, such as uncertainty or changing tastes. We use the term preference to refer, more specifically, to the preference for immediate utility over delayed utility.

This term is used in intertemporal economics, intertemporal choice , neurobiology of reward and decision making , microeconomics and recently neuroeconomics . [8] Traditional models of economics assume that the discounting function is exponential in time leading to a monotonic decrease in preference with increased time delay; However, more recent neuroeconomic models suggest a hyperbolic discount function which can address the phenomenon of preference reversal. [9]

Preference reversal

Offered a choice of $ 100 today and $ 100 in one month, individuals will most likely choose the $ 100 now. However, should the question change to having $ 100 today, or $ 1,000 in one month, individuals will most likely choose the $ 1,000 in one month. The $ 100 can be conceptualized as a Smaller Sooner Reward (SSR), and the $ 1,000 can be conceptualized as a Larger Later Reward (LLR). Researchers who are interested in the SSR to the LLR, or vice versa. For example, if you have a $ 1,000 to $ 60,000 (5 years). This means that this individual is worth $ 1,000 after a delay of 60 months less than $ 100 now. The LRR and the SSR as being equivalent. That is known as the indifference point [10]

See also

  • Decision theory
  • Delayed gratification
  • Discount function
  • Discounted utility
  • discounting
  • Dynamic inconsistency
  • Intertemporal choice
  • Net present value
  • Time value of money

Notes

  1. Jump up^ Frederick 2002, p. 352: “We distinguishtime discountingfromtime preference. We use the termtime discountingbroadly to encompass any reason for caring less about a future consequence, including factors that diminish the expected utility generated by a future consequence, such as uncertainty or changing tastes. We use the termpreferenceto refer, more specifically, to the preference for immediate utility over delayed utility. “
  2. Jump up^ Doyle 2013.
  3. Jump up^ Frederick 2002.
  4. Jump up^ Reisman 1996, pp. 55-56.
  5. Jump up^ MISES, LV Human Action. A Treatise on Economics. Scholar’s Edition. Alburn: Ludwig von Mises Institute, 1998. Pg. 480
  6. Jump up^ Doyle, John R. (2013). “Survey of time preference, delay discounting models” (PDF) . Judgment and Decision Making . 8 (2): 116-135. ISSN  1930-2975 .
  7. Jump up^ Bickel, WK; Odum, AL; Madden, GJ (1999). “Impulsivity and cigarette smoking: delay in everyday, never, and ex-smokers”. Psychopharmacology . 146 (4): 447-454. ISSN  0033-3158 . Doi : 10.1007 / PL00005490 .
  8. Jump up^ Takahashi T., Hadzibeganovic T., Cannas SA, Makino T., Fukui H., Kitayama S. (2009). “Cultural neuroeconomics of intertemporal choice” . Neuro Endocrinol. Lett . 30 (2): 185-91. PMID  19675524 .
  9. Jump up^ Green, Leonard; Myerson, Joel (2004). “A Discounting Framework for Choice with Delayed and Probabilistic Rewards.” Psychological Bulletin . 130 (5): 769-792. ISSN  0033-2909 . Doi : 10.1037 / 0033-2909.130.5.769 .
  10. Jump up^ Odum, Amy L. (2011). “Delay Discounting: I’m ak, You’re a k” . Journal of the Experimental Analysis of Behavior . 96 (3): 427-439. ISSN  0022-5002 . PMC  3213005  . PMID  22084499 . Doi : 10.1901 / jeab.2011.96-423 .

References

  • Reisman, George (1996), Capitalism: A Treatise on Economics (PDF) , Ottawa: Jameson Books, ISBN  978-0-915463-73-2
  • Frederick, Shane; Loewenstein, George; O’donoghue, Ted (2002). “Time Discounting and Time Preference: A Critical Review” (PDF) . Journal of Economic Literature . 40 (2): 351-401. ISSN  0022-0515 . Doi : 10.1257 / 002205102320161311 . A comprehensive review
  • Doyle, John R. (2013). “Survey of time preference, delay discounting models” (PDF) . Judgment and Decision Making . 8 (2): 116-135. ISSN  1930-2975 .