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What are Time Preferences and Intertemporal Choices?

Time preferences refer to how individuals value present rewards compared to future ones. Intertemporal choices are decisions involving trade-offs between costs and benefits at different points in time. People often prefer immediate rewards, even if waiting could bring greater benefits—a behavior known as present bias.

Key Concepts of Time Preferences & Intertemporal Choices

  • Hyperbolic Discounting

    • 🕒 People disproportionately prefer smaller rewards now over larger rewards later.

    • Example: You might choose to spend $100 now instead of saving it for future gains, even if you know saving is the better option long-term.

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  • Present Bias

    • 📅 We place more weight on the present than the future.

    • Example: Choosing to binge-watch a series tonight instead of studying for tomorrow’s exam, even though you know the future benefit of studying is higher.

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  • Commitment Devices

    • 🔒 Tools or strategies that help people overcome present bias by committing to future behavior.

    • Example: Setting up automatic savings deposits to avoid the temptation of spending money now.

How Do Time Preferences Affect Choices?

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  • Step 1: You face a decision involving immediate and future rewards.

    • 💸 For Immediate Rewards: Hyperbolic discounting leads you to choose the smaller, sooner reward.

    • 💡 For Future Rewards: Delaying gratification offers larger benefits, but requires more willpower.

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  • Step 2: You experience present bias, where the present feels more valuable than the future.

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  • Step 3: Commitment devices can help overcome the bias by locking in future decisions.

Time Preferences & Intertemporal Choices

Time Preferences

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  • Present Bias

    • 📅 More weight on present vs. future

    • 🎬 Immediate gratification

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  • Hyperbolic Discounting

    • 🕒 Disproportionate preference for smaller, immediate rewards

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  • Commitment Devices

    • 🔒 Pre-commitment to future choices

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