Time Preference

Overview

Time preference is an economic term that describes an individual’s affinity to wait on gratification that would be received in the present time in order to receive more gratification in the future. Given the limited amount of time a human has and the fact that a human’s life is very fragile, delaying instant gratification is often a hard decision to make. However, if humans always go for instant gratification, very little progress can be achieved. In this blog post, I’ll be discussing the impact of time preference on the life of individuals and why we should always restrain our instincts to go for the easy guaranteed instant gratification.

The only limited asset

One can argue that time is the only limited asset on earth. It’s even argued that the rarest of elements like gold is only rare because of the amount of time it takes to mine it. It seems foolish, but the more time we spend looking for gold, the more gold we find. It’s not gold that is limited, it’s the amount of time we have.

I have a limited amount of money because I have a limited amount of time. If I have more time to spend during the day, I can spend that time doing more work and thus gaining more money. But the fact that I have to spare 6~8 hours for sleeping in each cycle of 24 hours (a day), limits the amount of time I can spend on work and therefore limits the amount of money I get as an exchange for this work. The same argument holds for every other asset that I have.

The thing that makes time even more valuable than all the other assets is that an individual can not increase the amount of time they have. You can’t get more of it by digging in the ground. You can certainly buy some other individual’s time by paying them money in exchange for spending some of their time doing work for you. But the amount of money you have to pay them in exchange was also acquired by spending time. So in fact you’re only exchanging their time for your own. It is considered a profitable exchange for you when you spend less time acquiring the money you pay for them than the amount of time they spend doing the work.

The unpredictable nature of time

Evaluation of the amount of time spent on a certain matter gets even more complicated when one considers the fact that the amount of time one owns can never be known. With more simple assets like money, I can compare how much of the total amount of money I own a certain good represents and hence evaluate if that certain item is worth it’s. But with time, since the total amount is unknown I can’t know how much of my total lifetime would be represented by watching a TV show.

Knowing that my life can end in an instant with or without a specific reason leading to that event certainly makes the decision of deferring an instant gratification harder to make.

Time preference

The ratio that a human chooses to delay instant gratification in favor of more gratification in the future is called the time preference of that human. A higher value of time preference indicates better planning and better outcomes in the long term.

Consider the following borrowed example from the book “The bitcoin standard” by Saifedean Ammous. Two fishermen start with the same technique of fishing with a spear. On their first day, they both catch 2 fish and they’re happy about it. The first fisherman goes home and eats the two fish. The second fisherman goes home to only eat one fish and save the other one for tomorrow. On the second day, the first fisherman also catches 2 fish with the spear, while the second fisherman doesn’t go fishing and makes a fishing rod. The second fisherman can spare the amount of time they spend making the rod without worrying about dinner as they have saved a fish from yesterday.

On the third day, the second fisherman catches a lot more than just 2 fishes because the fishing rod is a lot more efficient. The first fisherman however still holds the record of 2 fish a day for dinner using the spear. The amount of fish the second fisherman catches gives them time to spend on building more fishing gear. After some time, the first fisherman still has to catch 2 fish a day to eat dinner while the second fisherman uses the boat they’ve built only once every week to get larger fish that the first fisherman has never seen. The second fisherman has a higher time preference than the first fisherman. Therefore the second fisherman achieved more in the long term and can use the saved time to pursue other activities.

This same argument holds for students choosing the instant gratification of playing games and having a good time while others study for the exams. Clearly, the ones who studied achieve more in the long term. Having a higher value of time preference is a skill one has to learn in order to succeed.

The marshmallow test

The famous marshmallow test further proves that having a higher time preference often leads to a better outcome in life. During this test, children were given a choice of having one piece of a marshmallow now or wait for 15 minutes to get 2 pieces of marshmallow. It was noted that the children who waited often got higher SAT scores.

Taming oneself

I think that it’s often beneficial to tame one’s desires for instant gratification no matter how hard it can get. If it were not for increasing the time preference amongst humans, we would still be living in rural conditions fishing with spears and catching fruit off of trees. After all, why would humans invent better tools if it was just the instant gratification they were seeking.