Intertemporal choice

Definition

Intertemporal choice refers to the decision-making process where individuals must weigh the benefits and costs of options that unfold over different time periods. This concept highlights how people value immediate rewards more highly than future ones, often leading to choices that may not align with their long-term goals. It is a key area of study in behavioral economics, showcasing how cognitive biases and emotional factors can influence economic decisions.

5 Must Know Facts For Your Next Test

1. Intertemporal choice is often illustrated through experiments like the marshmallow test, where participants must choose between immediate gratification and delayed reward.
2. Individuals typically exhibit a tendency to discount future rewards at an increasing rate, meaning they value rewards less as they are delayed further into the future.
3. The concept challenges traditional economic models that assume rational agents always make decisions that maximize utility over time.
4. Factors such as emotional state, social influences, and cognitive biases significantly impact how individuals approach intertemporal choices.
5. Understanding intertemporal choice can help in designing better policies aimed at promoting saving behavior or healthy lifestyle choices.

Review Questions

• How does intertemporal choice explain individuals' tendencies to prioritize immediate rewards over future benefits?
  • Intertemporal choice reveals that individuals often struggle to balance immediate gratification with long-term goals. This occurs because immediate rewards are perceived as more valuable due to emotional and cognitive biases. For example, someone might choose to spend money on a night out rather than saving for a future expense because the immediate pleasure outweighs the distant benefit in their mind.
• Discuss how hyperbolic discounting differs from traditional economic models in understanding intertemporal choice.
  • Hyperbolic discounting presents a challenge to traditional economic models that assume consistent rationality in decision-making. While standard models suggest that people will always prefer larger future rewards if they have enough time to plan, hyperbolic discounting indicates that people tend to prefer smaller immediate rewards much more strongly as the delivery date approaches. This inconsistency highlights the complexities of human behavior and the need for models that account for psychological factors.
• Evaluate the implications of intertemporal choice on public policy related to health and financial behaviors.
  • Intertemporal choice has significant implications for public policy, particularly in areas like health and finance. Policies aimed at promoting saving behaviors often need to consider how individuals naturally favor immediate gratification. By implementing strategies such as nudges or incentives that align short-term benefits with long-term goals—like matching contributions for retirement savings or providing immediate health benefits for preventative measures—policymakers can encourage better decision-making that leads to improved outcomes for individuals and society.

Related terms

Discounting: The process of determining the present value of future cash flows by applying a discount rate, reflecting the preference for immediate rewards over delayed ones.

Hyperbolic Discounting: A behavioral economics concept where people disproportionately prefer smaller, immediate rewards over larger, delayed rewards, leading to inconsistent decision-making over time.

Self-Control: The ability to regulate one's emotions, thoughts, and behaviors in the face of temptations and impulses, which plays a crucial role in intertemporal choice.