What is intertemporal choice?
In economics, intertemporal choice means how choices made now affect the choices that will be possible in the future. In theory, if you don’t consume today, you might consume a lot more in the future, and the same goes for the other way around.
How to Understand Intertemporal Choice
Many of our decisions affect how things will be in the future. Our choices about how much money to spend now and how much to save can significantly affect our quality of life now and in the future.
Companies must make choices about investments that affect more than one time period. On the other hand, people make short-term choices that can affect their future financial chances when saving money and planning for retirement.
When people save money today, they use less, decreasing their energy usage. As time passes, the savings grow, which means the person can buy more things and be more valuable in the future.
Most people can’t consume as much as they want to because of their budgets. However, behavioral finance theorists usually find that the present bias is expected. This means that people like to spend money now, even if it might have an effect in the future.
People often choose between times so that their short-term needs and wants come first over their long-term goals.
Example of an Intertemporal Choice
A person’s long-term wealth could be significantly affected if they make a huge purchase, like paying for a trip around the world that is way beyond their regular budget and needs additional financing. To pay for it, the person might get a personal loan, use all the available credit on their cards, or even take money out of their savings accounts.
This person would have less money to continue saving for retirement if they made this choice. The person may need to find other ways to make money on top of their regular pay to compensate for the loss of assets.
This could get worse if unexpected events happen that lower present income. For example, if someone suddenly lost their job, it would be hard to repay recent debts and save money for retirement. If customers buy something big and then lose their jobs, their choices in the present and outside circumstances could affect their future chances.
Maybe the person had planned to retire at a certain age or was on track to pay off their debt. Because they don’t have enough funds, they might have to put off retirement or get a second mortgage to pay for more immediate needs.
Different Types of Changes Between Times
Intertemporal options can also be affected by decisions about jobs. A professional might be given two job offers with rates that change based on how hard and demanding the roles are.
One job might be very stressful and require a lot of hours. It’s also possible that the pay is better than usual for the job.
As a choice between times, taking this job might give you more options for your retirement plans in the future. If, on the other hand, you take a job that pays less but gives you a better work-life balance, you might have fewer retirement choices and less money.
Conclusion
- Intertemporal choice is when you make choices in the present, like how much you spend, that can affect your financial chances in the future.
- In theory, if you don’t consume anything today, you might consume a lot more in the future, and the same goes for the other way around.
- Many people make decisions that meet their needs and wants because they like to focus on what they can consume right now.
