time preference

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)