Time-inconsistent preferences

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In economics, time-inconsistent preferences are preferences which are time-inconsistent in intertemporal choices. Decisions being made at different points in time can be inconsistent with each other depending on expected utility anomalies; thus people sometimes make time-inconsistent decisions.

Consider, for example, the following question:

  • (a)Which do you prefer, be given 500 dollars today or 505 dollars tomorrow?
  • (b)Which do you prefer, be given 500 dollars 365 days later or 505 dollars 366 days later?

When this question is asked, to be time-consistent, we must choose "505 dollars tomorrow" for question (a) and "505 dollars 366 days later" for question (b). According to George Loewenstein and Drazen Prelec, however, people are not always consistent.[1] People tend to choose "500 dollars today" and "505 dollars 366 days later", which is different from the time-consistent answer.

Stephen Hoch and George Loewenstein used the relationship of cigarette and good health to explain the concept of time-inconsistency preferences:[2]

...people are disproportionately attracted to immediately available rewards. When two rewards (e.g., the pleasure of cigarette and the pleasure of good health) are both substantially delayed, the individual is able to make a rational trade-off between them. However, when one reward (the cigarette in this example) is imminent, it exerts a disproportionate attraction.[3]

— Stephen, H and G. Loewenstein (1991)

References[edit]

  1. ^ Loewenstein, G. and D. Prelec (1992), "Anomalies in Intertemporal Choice: Evidence and an Interpretation", Quarterly Journal of Economics, 107, 2, pp. 573–597.
  2. ^ Hoch, Stephen and G. Loewenstein (1991), "Time inconsistent Preferences and Consumer Self control", Journal of Consumer Research, Vol 17, pp. 492-506.
  3. ^ Cited from H, Stephen and G. Loewenstein (1991),"Time inconsistent Preferences and Consumer Self control", Journal of Consumer Research, Vol 17, p.494.