key term - Intertemporal Choice

Definition

Intertemporal choice refers to the decision-making process where individuals must weigh the costs and benefits of options that have different time implications. It involves the tradeoffs people make between immediate gratification and delayed rewards or consequences.

5 Must Know Facts For Your Next Test

1. Intertemporal choice is a central concept in behavioral economics, as it helps explain how individuals make decisions involving tradeoffs across time.
2. People often exhibit a present bias, valuing immediate rewards more highly than delayed but larger rewards, even when the delayed reward is objectively better.
3. Hyperbolic discounting describes the tendency for the subjective value of a reward to decrease hyperbolically as the delay to that reward increases.
4. An individual's time preference, or relative valuation of present versus future payoffs, can significantly influence their intertemporal choices.
5. Factors like age, income, and personality traits can affect an individual's intertemporal decision-making and time preferences.

Review Questions

• Explain how intertemporal choice relates to the concept of time preference.
  • Intertemporal choice involves the tradeoffs people make between immediate and delayed rewards, which is directly influenced by their time preference. An individual's time preference reflects their relative valuation of present versus future payoffs, and this preference shapes their willingness to delay gratification and make choices that prioritize long-term benefits over short-term gains. Understanding an individual's time preference is crucial for predicting and explaining their intertemporal decision-making.
• Describe how the behavioral economic concept of hyperbolic discounting affects intertemporal choice.
  • Hyperbolic discounting is a cognitive bias that leads people to exhibit a stronger preference for more immediate payoffs relative to later payoffs, especially as the delay occurs sooner. This means that the subjective value of a reward decreases hyperbolically as the delay to that reward increases, rather than exponentially as traditional economic models assume. The presence of hyperbolic discounting in intertemporal choice can lead individuals to make decisions that prioritize short-term gratification over larger, delayed rewards, even when the delayed reward is objectively more beneficial.
• Analyze how an individual's present bias can influence their intertemporal choices and decision-making.
  • The tendency for people to have a stronger preference for immediate payoffs over future payoffs, known as present bias, can significantly impact their intertemporal choices. Even when the delayed reward is objectively better, the present bias can lead individuals to make decisions that prioritize short-term gratification, as they value immediate payoffs more highly than larger, delayed rewards. This bias can result in suboptimal choices, such as overspending, procrastination, or failing to save for the future. Understanding how present bias shapes intertemporal decision-making is crucial for developing strategies to help individuals make choices that better align with their long-term interests and goals.

Related terms

Time Preference: An individual's relative valuation of a present versus future reward, reflecting their willingness to delay gratification.

Hyperbolic Discounting:

A cognitive bias where people exhibit a stronger preference for more immediate payoffs relative to later payoffs as the delay occurs sooner.

Present Bias:

The tendency for people to have a stronger preference for immediate payoffs over future payoffs, even when the long-term outcome would be more beneficial.