Behavioural Economics by Michelle Baddeley

Author:Michelle Baddeley
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2016-11-21T00:00:00+00:00

What is time inconsistency?

Behavioural economics draws on evidence from psychology suggesting that the consistency in time preferences, as assumed in standard economic approaches, does not apply for humans (and other animals). We are disproportionately impatient in the short-term (we want our chocolate cake today) but when planning for the future, we are more patient (we are prepared to wait a year and a day for our chocolate cake). This is time inconsistency—our preferences for delayed outcomes are shifting over time. Our time preferences are not stable. We suffer from present bias—we have a disproportionate preference for smaller, immediate rewards over delayed but larger rewards—a reflection of underlying time inconsistency. Our capacity for patience is shifting over time. We are patient in some contexts, but impatient in others. For example—if we have £10 and we are deciding about spending it today, or saving it until next week, we are more likely to spend it today. When we are thinking about more distant decisions, we might be more patient—if we are thinking about spending £10 in a year, or saving it to spend in a year plus one week, then our choices may shift, and we will plan to save for that extra week. Trouble emerges when our impatience today means we have nothing left to spend or save in a year’s time, in a decade’s time, or when we retire.

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