Listened to a great episode on Patrick O’Shaughnessy’s podcast, Invest Like The Best. He interviews Saifedean Ammous, author of the book “Bitcoin Standard.” The episode is wide ranging but I found the first part of his interview about time preference interesting.
A few takeaways:
- Time preference (economics): Time preference is an economic term defined as the current relative valuation placed on receiving a good at an earlier date compared with receiving it at a later date. Said another way, a person with a high time preference is focused on their current well-being relative to the mean, while a person with low time preference places more emphasis on their well-being in the future (again, relative to mean).
- Origins: The time preference theory of interest was created by economists as an attempt to explain interest through the demand for immediate satisfaction.
- Why we pay interest: If I offered you $100 today vs. $100 one year from now, you’d take $100 today. The only way I can get you to take $100 one year from now is if I pay you interest on top of the $100. Interest rate is the price paid to lender so lender is willing to forego capital use.
- Time preference (psychology): As I discussed in a recent post about the “Marshmallow Test,” the delay of gratification literature was heavily influenced by the work of Walter Mischel, who showed that a simple experiment in which youngchildren were asked to choose between one cookie (or marshmallow) now and two in fifteen minutes could predict achievement later in life.
- This conclusion is logical. If a person has a low time preference, they then possess ability to delay gratification which means they are likely disciplined, patient, and thoughtful. These are all common traits of successful people.
- Potential ways to lower time preference:
- Educate communities on benefit of saving vs. spending
- Create policies that provides incentives for saving (or provide conditions for more and better paying jobs so people have the option to spend or save in the first place)
Posted in: general thoughts