Time preference

Last updated

In economics, time preference (or time discounting, [1] delay discounting, temporal discounting, [2] long-term orientation [3] ) is the current relative valuation placed on receiving a good or some cash at an earlier date compared with receiving it at a later date. [1]


Time preferences are captured mathematically in the discount function. The higher the time preference, the higher the discount placed on returns receivable or costs payable in the future.

One of the factors that may determine an individual's time preference is how long that individual has lived. An older individual may have a lower time preference (relative to what they had earlier in life) due to a higher income and to the fact that they have had more time to acquire durable commodities (such as a college education or a house). [4] . As future is inherently uncertain, risk preferences also affect time preferences. [5]


A practical example: Jim and Bob go out for a drink but Jim has no money so Bob lends Jim $10. The next day Jim visits Bob and says, "Bob, you can have $10 now, or I will give you $15 when I get paid at the end of the month." Bob's time preference will change depending on his trust in Jim, whether he needs the money now, or if he thinks he can wait; or if he'd prefer to have $15 at the end of the month rather than $10 now. Present and expected needs, present and expected income affect one's time preference.

Neoclassical views

In the neoclassical theory of interest due to Irving Fisher, the rate of time preference is usually taken as a parameter in an individual's utility function which captures the trade off between consumption today 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 generally seen as return on capital, with the real rate of interest equal to the marginal product of capital at any point in time. Arbitrage, in turn, implies that the return on capital is equalized with the interest rate on financial assets (adjusting for factors such as inflation and risk). Consumers, who are facing a choice between consumption and saving, respond to the difference between the market interest rate and their own subjective rate of time preference ("impatience") and increase or decrease their current consumption according to this difference. This changes the amount of funds available for investment and capital accumulation, as in for example the Ramsey growth model.

In the long run steady state, consumption's share in a person's income is constant which pins down the rate of interest as equal to the rate of time preference, with the marginal product of capital adjusting to ensure this 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; interest rates must be positive in order to induce impatient individuals to forgo current consumptions in favor of future.

Austrian economics

Time preference is a key component of the Austrian School of economics, [6] [7] it is used to understand the relationship between saving, investment and interest rates. [8] According to the Misesian branch of the school: In acting, an actor invariably aims to substitute a more satisfactory for a less satisfactory state of affairs and thus demonstrates a preference for more rather than fewer goods. Moreover, he invariably considers when in the future his goals will be reached, i.e., the time necessary to accomplish them, as well as a good's duration of serviceability. Thus, he also demonstrates a universal preference for earlier over later goods, and for more over less durable ones. This is the phenomenon of time preference. Every actor requires some amount of time to attain his goal, and since man must always consume something and cannot entirely stop consuming while he is alive, time is always scarce. Thus, ceteris paribus, present or earlier goods are, and must invariably be, valued more highly than future or later ones. In fact, if man were not constrained by time preference and if the only constraint operating on him were that of preferring more over less, he would invariably choose those production processes which yielded the largest output per input, regardless of the length of time needed for these methods to bear fruit. [9]

Temporal discounting

Temporal discounting (also known as delay discounting, time discounting) [10] is the tendency of people to discount rewards as they approach a temporal horizon in the future or the past (i.e., become so distant in time that they cease to be valuable or to have additive effects). To put it another way, it is a tendency to give greater 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 assign little or no value to a cigarette available in 6 months. [11]

Regarding terminology, from Frederick et al. (2002):

We distinguish time discounting from time preference. We use the term time discounting broadly 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 time 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. [12] Traditional models of economics assumed 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. [13] Temporal discounting is also a theory particularly relevant to the political decisions of individuals, as people often put their short term political interests before the longer term policies. [14] This can be applied to the way individuals vote in elections but can also apply to how they contribute to societal issues like climate change, that is primarily a long term threat and therefore not prioritised. [15]

Assessing temporal discounting

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 study temporal discounting are interested in the point in time in which an individual changes their preference for the SSR to the LLR, or vice versa. For example, although an individual may prefer $1,000 in one month over $100 now, they may switch their preference to the $100 if the delay to the $1,000 is increased to 60 months (5 years). This means that this person values $1,000, after a delay of 60 months, less than $100 now. The key is to find the point in time in which the individual values the LLR and the SSR as being equivalent. That is known as the indifference point. [16] Preferences can be measured by asking people to make a series of choices between immediate and delayed payoffs, where the delay period and the payoff amounts are varied.

Origin of differences in time preference across countries

Differences of time preferences across countries have been found in several large-scale studies, in particular the INTRA study [17] and the GPS study. [18]

Oded Galor and Omer Ozak explore the roots of observed differences in time preference across nations. [19] They establish that pre-industrial agricultural characteristics that were favorable to higher return to agricultural investment triggered a process of selection, adaptation, and learning that brought about a higher prevalence of long-term orientation. These agricultural characteristics are associated with contemporary economic and human behavior such as technological adoption, education, saving, and smoking.

The most comprehensive data set of time preferences encompasses 117 countries and is calculated by merging several previous datasets, including the aforementioned INTRA- and GPS-data, but also, e.g., survey questions from the World Value Survey. [20]

Historical understanding of time preference theory in relation to interest rates


The Catholic scholastic philosophers firstly brought up sophisticated explanations and justifications of return on capital, including risk and the opportunity cost of profit forgone, associated with the discount factor. However, they failed to interpret the interest on a riskless loan and hence denounced the time preference discounter as sinful and usurious.

Later, Conrad Summenhart, a theologian at the University of Tübingen, used time preference to explain the discount loans, where the lenders won't profit usuriously from the loans as the borrowers would accept the price the lenders ask. A half-century later, Martin de Azpilcueta Navarrus, a Dominican canon lawyer and monetary theorist at the University of Salamanca, held the view that present goods, such as money, will naturally be worth more on the market than future goods (money). At about the same time, Gian Francesco Lottini da Volterra, an Italian humanist and politician, discovered time preference and contemplated time preference as an overestimation of "a present" that can be grasped immediately by the senses. Two centuries later, Ferdinando Galiani, a Neapolitan abbot, used an analogy to point out that just similar to the exchange rate, the interest rate links and equates the present value to the future value, and under people's subjective mind, these two physically non-identical items should be equal.

These scattered thoughts and progression of theories inspired Anne Robert Jacques Turgot, a French statesman, to generate a full-scale time preference theory: what must be compared in a loan transaction is not the value of money lent with the value repaid, but rather the 'value of the promise of a sum of money compared to the value of money available now; [22] in addition, he analyzed the relation between money supply and interest rates: If money supply increases and people with insensitive time preference receive the money, then these people tend to hoard money for savings instead of going for consumptions, which will cause interest rates to fall while prices to rise.

See also


  1. 1 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. doi:10.1257/jel.40.2.351. Archived from the original (PDF) on 2017-03-11. Retrieved 2014-11-02.
  2. Doyle, John R. (2013). "Survey of time preference, delay discounting models" (PDF). Judgment and Decision Making. 8 (2): 116–135. doi:10.1017/S1930297500005052.
  3. Hofstede, Geert (2001). Culture's consequences: Comparing values, behaviors, institutions and organizations across nations. Sage publications.
  4. Bayer, Y. M.; Osher, Y. (2018). "Time preference, executive functions, and ego-depletion: An exploratory study". Journal of Neuroscience, Psychology, and Economics. 11 (3): 127–134. doi:10.1037/npe0000092. S2CID   149582921.
  5. Somasundaram, Jeeva; Eli, Vincent (2022). "Risk and time preferences interaction: An experimental measurement". Journal of Risk and Uncertainty. 65 (2): 215–234. doi:10.1007/s11166-022-09394-9. S2CID   219346855.
  6. Judy (2018-12-14). "A Brief Defense of Mises's Conception of Time Preference and His Pure Time Preference Theory of Interest". Mises Institute. Retrieved 2023-10-06.
  7. Clay (2017-04-10). "11. Time and Time Preference". Mises Institute. Retrieved 2023-10-06.
  8. "Time preference | economics | Britannica". www.britannica.com. Retrieved 2023-10-06.
  9. Hoppe, Hans-Hermann (2018-02-06). Democracy: The God That Failed. doi:10.4324/9780203793572. ISBN   978-0-203-79357-2.
  10. Doyle, John R. (2013). "Survey of time preference, delay discounting models" (PDF). Judgment and Decision Making. 8 (2): 116–135. doi:10.1017/S1930297500005052. ISSN   1930-2975.
  11. Bickel, W. K.; Odum, A. L.; Madden, G. J. (1999). "Impulsivity and cigarette smoking: delay discounting in current, never, and ex-smokers". Psychopharmacology. 146 (4): 447–454. doi:10.1007/PL00005490. ISSN   0033-3158. PMID   10550495. S2CID   24789357.
  12. Takahashi T.; Hadzibeganovic T.; Cannas S. A.; Makino T.; Fukui H.; Kitayama S. (2009). "Cultural neuroeconomics of intertemporal choice". Neuro Endocrinol. Lett. 30 (2): 185–91. CiteSeerX . PMID   19675524.
  13. Green, Leonard; Myerson, Joel (2004). "A Discounting Framework for Choice With Delayed and Probabilistic Rewards". Psychological Bulletin. 130 (5): 769–792. doi:10.1037/0033-2909.130.5.769. ISSN   0033-2909. PMC   1382186 . PMID   15367080.
  14. Schafer2016
  15. Baum2010
  16. Odum, Amy L. (2011). "Delay Discounting: I'm a k, You're a k". Journal of the Experimental Analysis of Behavior. 96 (3): 427–439. doi:10.1901/jeab.2011.96-423. ISSN   0022-5002. PMC   3213005 . PMID   22084499.
  17. Wang, Mei; Rieger, Marc Oliver; Hens, Thorsten (2016). "How time preference differ: evidence from 53 countries" (PDF). Journal of Economic Psychology. 52: 115–135. doi:10.1016/j.joep.2015.12.001.
  18. Falk, Armin; Becker, Anke; Dohmen, Thomas; et al. (2018). "Global evidence on economic preferences". The Quarterly Journal of Economics. 133 (4): 1645–92. doi: 10.1093/qje/qjy013 .
  19. Galor, Oded; Özak, Ömer (2016). "The Agricultural Origins of Time Preference". American Economic Review. 106 (10): 3064–3103. doi:10.1257/aer.20150020. PMC   5541952 . PMID   28781375.
  20. Rieger, Marc; Wang, Mei; Hens, Thorsten (2021). "Universal Time Preference". PLOS ONE. 16 (2): e0245692. doi: 10.1371/journal.pone.0245692 . PMC   7888607 . PMID   33596234.
  21. The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume
  22. Turgot, A.R.J. 1977. In The Economics of A.R.J. Turgot, ed. P.D. Groenewegen. The Hague: Martinus Nijhoff.

Related Research Articles

<span class="mw-page-title-main">Discounting</span> When a creditor delays payments from a debtor in exchange for a fee

In finance, discounting is a mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee. Essentially, the party that owes money in the present purchases the right to delay the payment until some future date. This transaction is based on the fact that most people prefer current interest to delayed interest because of mortality effects, impatience effects, and salience effects. The discount, or charge, is the difference between the original amount owed in the present and the amount that has to be paid in the future to settle the debt.

Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as share prices, interest rates and exchange rates, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital. It thus provides the theoretical underpinning for much of finance.

This aims to be a complete article list of economics topics:

<span class="mw-page-title-main">Capital asset pricing model</span> Model used in finance

In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio.

Intertemporal choice is the study of the relative value people assign to two or more payoffs at different points in time. This relationship is usually simplified to today and some future date. Intertemporal choice was introduced by John Rae in 1834 in the "Sociological Theory of Capital". Later, Eugen von Böhm-Bawerk in 1889 and Irving Fisher in 1930 elaborated on the model.

Neuroeconomics is an interdisciplinary field that seeks to explain human decision-making, the ability to process multiple alternatives and to follow through on a plan of action. It studies how economic behavior can shape our understanding of the brain, and how neuroscientific discoveries can guide models of economics.

<span class="mw-page-title-main">Consumption (economics)</span> Using money to obtain an item for use

Consumption is the act of using resources to satisfy current needs and wants. It is seen in contrast to investing, which is spending for acquisition of future income. Consumption is a major concept in economics and is also studied in many other social sciences.

In economics, hyperbolic discounting is a time-inconsistent model of delay discounting. It is one of the cornerstones of behavioral economics and its brain-basis is actively being studied by neuroeconomics researchers.

Economic theories of intertemporal consumption seek to explain people's preferences in relation to consumption and saving over the course of their lives. The earliest work on the subject was by Irving Fisher and Roy Harrod, who described 'hump saving', hypothesizing that savings would be highest in the middle years of a person's life as they saved for retirement.

In economics, dynamic inconsistency or time inconsistency is a situation in which a decision-maker's preferences change over time in such a way that a preference can become inconsistent at another point in time. This can be thought of as there being many different "selves" within decision makers, with each "self" representing the decision-maker at a different point in time; the inconsistency occurs when not all preferences are aligned.

In economics, discounted utility is the utility (desirability) of some future event, such as consuming a certain amount of a good, as perceived at the present time as opposed to at the time of its occurrence. It is calculated as the present discounted value of future utility, and for people with time preference for sooner rather than later gratification, it is less than the future utility. The utility of an event x occurring at future time t under utility function u, discounted back to the present using discount factor Is

Social discount rate (SDR) is the discount rate used in computing the value of funds spent on social projects. Discount rates are used to put a present value on costs and benefits that will occur at a later date. Determining this rate is not always easy and can be the subject of discrepancies in the true net benefit to certain projects, plans and policies. The discount rate is considered as a critical element in cost–benefit analysis when the costs and the benefits differ in their distribution over time, this usually occurs when the project that is being studied is over a long period of time.

In economics exponential discounting is a specific form of the discount function, used in the analysis of choice over time. Formally, exponential discounting occurs when total utility is given by

The following outline is provided as an overview of and topical guide to finance:

In economics, marginal utility describes the change in utility of one unit of a good or service. Marginal utility can be positive, negative, or zero.

George W. Ainslie is an American psychiatrist, psychologist and behavioral economist.

Paul W. Glimcher is an American neuroeconomist, neuroscientist, psychologist, economist, scholar, and entrepreneur. He is one of the foremost researchers focused on the study of human behavior and decision-making, and is known for his central role in founding and developing the field of neuroeconomics which takes an interdisciplinary approach to understanding how humans make decisions. Glimcher also founded the Institute for the Study of Decision Making at New York University (NYU). Today he serves as Chair of the Department of Neuroscience and Director of the Neurosciences Institute at NYU's Grossman School of Medicine.

In economics and finance, an intertemporal budget constraint is a constraint faced by a decision maker who is making choices for both the present and the future. The term intertemporal is used to describe any relationship between past, present and future events or conditions. In its general form, the intertemporal budget constraint says that the present value of current and future cash outflows cannot exceed the present value of currently available funds and future cash inflows. Typically this is expressed as

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

Reflections on the Formation and Distribution of Wealth was a treatise written by the French Enlightenment philosopher and civil servant Anne Robert Jacques Turgot. First published in 1770, this work discusses several topics, among them agricultural society, capital, commerce, money, the nature of interest, and both personal and national wealth.