Time preference – what is it?D. Olsson
One important thing that separates us humans from other primates, apart from the obvious things, is that humans are able to consciously delay gratification of things. Like saving food or money for scarcer times, or investing resources for future growth. This ability is one of many important catalysts to building a successful society.
In economic terms, this behaviour is driven by something called time preference.
If someone prefers having or consuming a resource immediately that’s considered having a high time preference. But if someone prefers having or consuming the resource at a later point, possibly in exchange for getting a bit more out of that resource, that’s considered having a low time preference.
For example, a child with high time preference will want to have a cookie now, instead of two cookies an hour later.
There’s been a lot of research around human behaviour when it comes to time preference. While the research differs in many aspects, it’s reasonable to draw the conclusions that if all things are equal, humans tend to prefer instant gratification (high time preference) over delayed gratification (low time preference). That is, if the benefit or marginal utility of delaying gratification is low or minimal, it’s natural to prefer instant gratification.
High or low? Which is better?
Neither is necessarily better or worse. It depends on what outcomes you strive for, how old you are etc. However, many economists would say that society today, at least on average, has a too high time preference. Consumerism has arguably gone too far and become unsustainable for the economy, our health and for our environment. What’s causing this high time preference?
What will influence our economic time preference?
Research and academia differ on what the real drivers are behind time preference in economical activity. The opposing ends are Neoclassical economic theory (mainstream economics) on the one side, and the Austrian School of economics on the other. Without going into detail on the differing views, I will try to explain time preference from a mainstream point of view.
Things that tend to influence our time preference are political factors, confidence about the future (or lack there of), employment rates etc. These factors affect the inflation rate which affect our time preference. Our time preference, in turn, has a knock-on effect on interest rates.
Practically speaking, with high inflation rates you have an incentive to keep a high time preference and spend (or even borrow) money right now since there’s a decrease in utility of that money in the future (it will be worth less because of inflation). This is natural behaviour under such economic circumstances.
With low or negative inflation rates you have an incentive to lower your time preference by saving, lending or investing that money for future utility (earning interest rate or other yield).
A look at global debt
We’ve been able to draw the simple conclusion that inflation rates will have an effect on our time preference. But what can we say about society’s general level of time preference? Are we doing well? Too high or too low time preference?
If we look at the global-debt-to-GDP ratio one can reasonably argue that it has reached catastrophic levels. That is to say, short-term spending without economic growth has increased. Global pollution is also increasing dramatically, showing that we don’t care about the future utility of our planet. Our general time preference is probably too high!
How do we go about lowering our time preference? Why haven’t our current political and economical systems succeeded in lowering our time preference? In the next post I’ll cover some of my personal opinions on this.