On a larger level, ideas such as sign effects, sub-additivity, and the elicitation method can influence how people display time preference.
Work on time preference began with John Rae’s “The Sociological Theory of Capital” in an attempt to answer why wealth differed across nations.
[1] He theorized that it was due to differences in saving an investment from the population, ultimately driven by tolerance for uncertainty and ability to delay gratification.
Arbitrage, in turn, implies that the return on capital is equalized with the interest rate on financial assets (adjusting for factors such as inflation and risk).
Rather, the causality goes in the opposite direction; interest rates must be positive in order to induce impatient individuals to forgo current consumption in favor of future.
Time preference is a key component of the Austrian school of economics;[5][6] it is used to understand the relationship between saving, investment and interest rates.
[7][8] The Catholic scholastic philosophers firstly brought up sophisticated explanations and justifications of return on capital, including risk and the opportunity cost of profit forgone, associated with the discount factor.
[9] However, they failed to interpret the interest on a riskless loan and hence denounced the time preference discounter as sinful and usurious.
[14] Traditional models of economics assumed that the discounting function is exponential in time leading to a monotonic decrease in preference with increased time delay; however, more recent neuroeconomic models suggest a hyperbolic discount function which can address the phenomenon of preference reversal.
Although the equation was never meant to be normative, ie, making a recommendation as to how people behave, it was the first template for modeling utility over time.
Although the exponential equation provides a nice rationale for discounting in accordance with utility theory, the apparent rate, when measured in the lab, is not constant.
Researchers found that there is a first day effect, meaning that people greatly value immediate rewards over those in the future.
People’s preferences would change based on the framing of the question or the exact decision being made; one discount rate was hard to find.
[20] To measure gains and losses, he asked about the same numerical earnings or debts framed as winnings from a bank lottery or a traffic ticket.
He found that gains are discounted more than losses, meaning that, they valued earning money sooner than delaying debts.
The idea is that one wants a positive event to occur and does not want to wait for it; on the other hand, people may not mind to delay a negative outcome such as a monetary loss.
Researchers who study temporal discounting are interested in the point in time in which an individual changes their preference for the SSR to the LLR, or vice versa.
In a study of the utility of long term water quality improvements, Viscusi et al. find that black respondents displayed higher discounting than other racial groups.
The theory was confirmed in the analysis, wherein more early life stress was significantly correlated with present orientation on a future discounting task.
Economist Thomas Schelling argued that climate change is an intergenerational discounting problem, where we are essentially deciding how to distribute utility between the current and future generations.
Climate abatement techniques, viewed through this lens, need to be weighed against other wealth redistributions, such as direct payments or subsidies for other goods and industries.
One of the first papers to address this issue was Frank Ramsey’s “A Mathematical Theory of Saving.” In it, he calculates the amount which a nation should save to protect future generations.
[43] Since many of the psychological factors that cause discounting behavior also vary across countries, it makes sense that time preference may not be universal.
These agricultural characteristics are associated with contemporary economic and human behavior such as technological adoption, education, saving, and smoking.
Initial research in this area was pioneered by Chapman and Elstein, who discovered discrepancies between how people discount health versus monetary outcomes.
The findings from Odum, Baumann, and Rimington echoed earlier research by showing that individuals displayed more patience when discounting money compared to directly consumable rewards such as alcohol and food.
Similar results were highlighted by Estle et al., who found consistent patterns of steeper discounting for direct consumables compared to monetary rewards.
[54] His findings revealed significant variability, ranging from a discount rate of 3% for saving lives in 100 years to 29% for adaptation efforts to prevent flooding.
Together, these reviews indicate that the domain of the reward or consequence plays a significant role in discounting behavior, whether it involves money, health, consumables, or environmental outcomes.
The insights from these studies emphasize the importance of understanding domain-specific discounting to inform policy and decision-making across various fields.