Time Preference

In the 19th century the Austrian Economist, Bohm Bawerk, introduced what we now know as time preference. In Bawerk’s words: “Present goods are always of more value than future goods of the same kind and quantity.”

Basically, the law of time preference says that, ceteris paribus, individuals prefer to achieve their goals as quickly as possible. Or, to put it another way: Other things being equal, present satisfaction is preferable to future satisfaction (SOTO, 2008).

It is important to note that the time preference ‘rate’ will always be positive, but although positive, it will vary from individual to individual. Even the same individual may have different time preference ‘rates’ throughout life.

When the agent is primarily concerned with the present and little concerned with the future, we say it has a high time preference.

For didactic purposes, let us look at some examples of characters – well known to the general public – who have a high time preference:

The Prodigal Son, who by spending his entire advance on his inheritance in a short time, demonstrated at that time to have a high time preference.

The Grasshopper, from the fable the Grasshopper and the Ant, who by having fun and saving nothing for the winter, has shown to have a high time preference.

The little brother from the story of the three little pigs is another example of high time preference. He quickly builds a straw house so he can go outside to play.

There are not only agents with high time preferences. There are also those with low time preferences.

When the agent is very willing to postpone its present satisfaction for a greater satisfaction in the future, we say that it has a low time preference.

As examples of characters with low time preference we have:

The ant, which consumed less than it produced. That is, it saved to have something to eat in the winter.

The oldest little pig, from the story of the three little pigs, who gave up his fun in the present to build a brick house that was able to withstand attacks from predators.

A very famous test created in the late 1960s – known as the marshmallow test – aimed to see children’s ability to forego an immediate pleasure in exchange for a greater reward in the future.

Basically, in this test, the child is told that if he waits alone in the room for a given time – 15 minutes for example – and does not eat the candy in front of him during that time, he will receive a second candy as a reward, thus having doubled the number of sweets he would have. But, if he leaves the room and/or eats the candy before the 15 minutes are up, he wouldn’t get the reward.

Assuming that the child likes the candy in question, and understanding the concept of time preference, we can say that the child who waits the 15 minutes without eating the candy demonstrates a low time preference and the one who eats the candy before and/or leaves of the room, most likely has a high time preference.

As stated earlier, each individual’s rate of time preference is not fixed and children generally have higher time preferences than adults. But even knowing this, we can draw a parallel between children who wait the 15 minutes to be able to have more sweets in the future and adults who save (renounce consumption in the present) and allocate their savings in financial applications, so that in the future they can have more resources than at present.

References:

BÖHM-BAWERK, Eugene Von. Positive Theory of Capital.

SOTO, Jesús Huerta de. The Austrian School: Market Order and Entrepreneurial Creativity.

https://www.onze.com.br/blog/teste-do-marshmallow/ (Accessed: 07/12/2022).