Time Preference

In economics, time preference (or "discounting") is the relative valuation placed on a good at an earlier date compared with its valuation at a later date.

There is no absolute distinction that separates "high" and "low" time preference, only comparisons with others either individually or in aggregate. Someone with a high time preference is focused substantially on his well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future.

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.

The time preference that an individual exhibits at any given moment is determined solely by their personal preferences. As such, if one "prefers" to save his money but cannot do so in the present, he is still considered to have a low time-preference. 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 he had earlier in life) due to a higher income and to the fact that he has had more time to acquire durable commodities (such as a college education or a house).

The time preference theory of interest is an attempt to explain interest through the demand for accelerated satisfaction. This is particularly important in microeconomics.

In the neoclassical theory of interest due to Irving Fisher, the interest rate determines the relative price of present and future consumption. Time preference, in conjunction with relative levels of present and future consumption, determines the marginal rate of substitution between present and future consumption. These two rates must necessarily be equal, and this equilibrium is brought about by the relative prices of present and future consumption.

Read more about Time Preference:  Neoclassical Views, Austrian School Views, Social Anarchist Views

Other articles related to "time preference, preference":

Time Preference - Social Anarchist Views
... Many social anarchists object to the theory of time preference being applied to an economy as a whole in a capitalist society ...
Liquidity Trap - Criticisms
... low interest rates are the result of malinvestment and time preference instead of liquidity preference ... have rejected Keynes' theory of liquidity preference altogether ... book America's Great Depression, Murray Rothbard argued that interest rates are determined by time preference ...
Antal E. Fekete - Contributions To Economical Thought
... By merging the Time Preference Theory on the Origin of Interest with the Productivity of Capital, resulting in what he calls his Hexagonal Model, the drivers for the ceiling and the floor rate ... Grounded in Mengerian roots, the floor rate of interest is formed by the time preference theory as treated by Von Mises but adapted to the marginal time preference and ...

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