Economics Finance

Time Preference

Time Preference in economics, referes to the inherent human tendency to value the present satisfaction more than future satisfaction. People value goods and services available in the present more than the same goods and services available in the future. It is a concept that plays a crucial role in decision-making, especially in the realm of consumption and investment. This is largely due to the risks or uncertainty of the future. The common example is, if given the choice between ¥100 today and ¥150 a year from now, most people would chose to receive ¥100 today.

This principle is a fundamental concept in economics and finance, influencing interest rates, investment decisions, and consumption patterns. Individuals and societies exhibit varying degrees of time preference, influencing their choices regarding saving, spending, and planning for the future. There are people with varying degree of High Time Preference and Low Time Preference.

High Time Preference

High time preference characterizes individuals who prioritize immediate gratification over delayed gradification. People with high time preference are often inclined to consume resources quickly, spending money and resources on instant pleasures without much consideration for the future consequences. These kind of people might struggle with saving or investing for the long term and may have difficulties in planning for the future, retirement or other distant and big goals. This kinds can be associated with impulsive behavior and a preference for short term gains and immediate rewards.

The society or groups with a prevalent high time preference lacks long term planning, economic stability and sustainable resource management. There might also occur various challenging phases in those kinds. The encouragement in savings, investment and education for the future become very essential in addressing the potential downside associated with the high time preference.

Low Time Preference

On the other hand, low time preference is characteristic of individuals or groups who prioritize delayed gratifation and are willing to forgo immediate rewards for more substantial future benefits. People with low time preference tend to save, invest and plan for the long term sustainability in terms of economics and finance and overall well being. They are more likely to make decisions that consider the future implications and are generally better equipped to handle the delayed rewards.

The society or groups with low time preference focus on economic stability, sustainable resource management and long term planning for the future. Policies that incentivize saving, responsible investment, and education for future generations are likely to find more resonance in communities with a lower time preference.

Understanding time preference is crucial in economic analysis and policy making as it provides insights into individual and societal decision-making processes, helping shape strategies that promote sustainable growth and well-being over time. The uncertainty and risk of the future, the morality of the individual and the need for consumption and survival makes the rational human to naturally prefer his present well-beign. In societies with people prefering the delayed gratification, there is usually more technological advancement in the long run. There is more peace and prosperity as people in such societies are aware that conflicts hinder the smooth production of capital goods and conduction of economic activities.

There is a well known Stanford Marshmallow experiment carried out by Mischel and Ebbe Ebbesen in 1960 which showed that child who was more capable of delaying gratification had better future outcome decades later. Basically children with low time preference had better academic performance and were without any kind of addiction or body weight problems.

Time Preference and Fiat

Lets think about time preference in terms of economy as a whole. Politicians or leaders in office does whatever to show instant result to prove/show their effeciency at office kicking the can down the road. But what actually happens is the way they create policies creates compounding destruction in the long run. Recently we have seen the government around the world printing uncountable amount of their national currencies. This led to the rising debt of countries around the world. Due to this arbitrary printing of new amount of currency by central banks, fiat currencies have lost its purchasing power over time. The store of value property of Money is no more working as it should. You can check Value Exchange to read about properties of Money. Knowing this situation, there is no way any rational citizen tend to save money and are incentivized to accumulate more debt than before. This creates low productivity as its consequence which does not result in better future for anyone. Society deteriorates this way.

Time Preference and Bitcoin

Monetary system that encourage low time preference, saving, capital accumulation and production create societal, technological advancements that moves and impact society in positive direction. Bitcoin rectifies these flawed incentives of fiat monetary system. It does that by eliminating fiat money and creating natural market to force supply and demand to operate effectively. It has the scheduled time for its production which noone have control over and its supply is limited to 21 million. This way Bitcoin will make politics less influential and the economy can get freed from stagnation. Bitcoin allows civilization to progress further. Ofcourse it will take time because the wealthy individuals and bureaucrats and bankers are the one who will try their best to not allow Bitcoin work like they’re already working on CBDCs. But the fact is no one can stop it from working. I highly recommend the book Bitcoin: The Hard Money you can’t F*** with. The young people, citizens of developing countries and producers of value adding goods and services will inevitably gravitate towards the fairer system offered by Bitcoin. The result, as Jimmy Song writes in his book, Fiat Ruins Everything, the zombies will be left only to cannibalize themselves.

Thank you for reading. See you on next one.

Leave a Reply

Your email address will not be published. Required fields are marked *