Money And Time Preference- Importance Of Time Preference
The Stanford marshmallow experiment, which was done in the late 1960s, serves as an excellent example of the relevance of temporal preference. As a reward for not eating their marshmallow or cookie, psychologist Walter Mischel would return after 15 minutes with a second one.
Author:James PierceReviewer:Camilo WoodFeb 18, 2022356 Shares355.6K Views
The Stanford marshmallow experiment, which was done in the late 1960s, serves as an excellent example of the importance of time preference. As a reward for not eating their marshmallow or cookie, psychologist Walter Mischel would return after 15 minutes with a second one. If the children hadn't eaten their treat, they may have the second one at no additional charge. Children may either have a piece of candy right now or have to wait and get two pieces of candy in exchange for postponing their pleasure.
While the students with a lower desire for time were able to hold out for the second piece of candy, those with a greater preference for time were unable to. Following up decades later, Mischel observed a strong association between low time preference and excellent academic success, high SAT score, low body fat index, and absence of drug addiction in the offspring.
Trading Off With One's Future Self Is The Most Crucial Economic Choice Each Human Makes
With other people, you'll likely do some little business, but you'll do far more business with your future self every day. These trades include deciding to save money rather than spend it; investing in future employment rather than looking for a low-paying job right away; buying a functional and affordable car rather than getting into debt for an expensive one; working overtime rather than going out to party with friends; or, my favorite example to use in class: deciding to study the course material every week of the semester rather than slacking off.
In each of these situations, no one is forcing the person to make a decision, and the individual is the primary benefit or loser from the repercussions of these decisions. The most important aspect in a man's decisions in life is his preference for how much time he has. In general, there is a substantial association between people's time preferences and self-control in all facets of decision-making. A man's fate will be heavily influenced by the deals he makes with his future self, which is a depressing thought to ponder.
Many Things Influence People's Time Preferences
Most individuals agree that protecting themselves and their possessions is important. People who live in dangerous locations face a greater risk of death and, as a consequence, discount the future more heavily, leading to a larger preference for the present than people who live in stable cultures.
Other factors that influence individuals' time preferences include security of property, as governments or thieves may expropriate individuals' property capriciously, resulting in individuals prioritizing spending their resources on immediate gratification rather than investing them in property that could be appropriated at any time. In addition, the burden of higher taxes will reduce people's ability to save and invest for the future, causing them to work less and save less, especially for those on a low income, where the majority of their income is used to meet basic needs. This has a negative impact on people's time preferences.
However, for the purposes of this study, the most important element influencing time choice is the predicted future worth of money. With the freedom to pick their money, individuals are more likely to invest in money that will keep its value over time in a free market.
More stable currencies encourage individuals to put off spending in favor of saving and investing for the future, which increases capital accumulation and raises living standards while also making people less interested in non-economic activities.
Money Depreciation Is A Sort Of Taxes Or Expropriation
Lowering the actual worth of one's money, despite the fact that the nominal value remains the same. Because it encourages people to borrow and invest, artificially low interest rates are a desired aim for contemporary economists in countries where government-issued money is prevalent.
A side consequence of this policy of artificially lowering the price of capital is a decrease in the interest rate that savers and investors get as well as the interest that borrowers pay. Savings will be reduced, and borrowing will be increased, as a result of this process. Individuals are likely to spend more of their money and take out additional loans in the short run. As a result, this will have far-reaching consequences for their time preferences in financial choices, as well as their whole lives.
Summary
Real wages stagnate or decline even if nominal wages are increased by printing ever more depreciating pieces of paper money, even if society saves less, accumulates less capital, and possibly begins to consume its capital; worker productivity remains constant or declines, resulting in the stagnation of real wages. People's decision-making becomes more present-oriented as they spend more and save less, which leads to moral shortcomings and a greater propensity to engage in conflict, harmful conduct, and self-destructive tendencies.
James Pierce
Author
Camilo Wood
Reviewer
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