JANUARY 28
Time Preference
Why We Choose Today or Tomorrow
The Signal
People naturally think further into the future when today’s work will still hold its value tomorrow.
The Reading
Imagine two young couples who both dream of buying their first home. They earn similar incomes, work equally hard and faithfully put the same amount of money aside every fortnight.
The first couple save in something that reliably retains the value of their work over time. With every passing year they feel themselves moving closer to their goal. Saving becomes exciting. Delaying a holiday, resisting impulse purchases and thinking years ahead all feel worthwhile because tomorrow continues to reward today’s sacrifice.
The second couple also save faithfully, but each year they discover that the cost of buying a home has risen faster than the value of their savings. Although they are making the same sacrifices, their dream seems to drift further away. Gradually, they begin asking themselves, “What’s the point of waiting?” Saving becomes discouraging, spending today becomes easier, and the future no longer feels worth planning for.
This difference is known as time preference. A long time preference develops when people believe today’s sacrifices will be rewarded tomorrow. A short time preference develops when those same sacrifices appear to lose their value over time. Neither is simply a matter of discipline. Both are shaped by the incentives people experience every day.
When the future rewards patience, people naturally begin living for tomorrow. When the future punishes patience, people naturally begin living for today.
First Principles
A long time preference grows when tomorrow rewards today’s sacrifices.
A short time preference grows when waiting no longer protects the value of today’s work.
The incentives surrounding money influence how people think about the future.
Today’s Challenge
Imagine you are saving for something that will take several years to achieve.
How would your behaviour change if every year your savings brought you closer to your goal?
How would it change if, despite making the same sacrifices, your goal seemed to move further away?
Which situation would encourage you to think further into the future?
Tomorrow’s Signal
Why Power Wants Money