Samiksha Jaiswal (Editor)

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. 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:

    References

    Time-inconsistent preferences Wikipedia