Time Preference
Any economist knows the term time preference. When it comes to money, finance, banking, and even consumer choice, time preference plays a major role. Consider this scenario: You’re at McDonald’s you can buy a 32oz drink for $1, or go to the nearby gas station and buy one for $.69. Assuming all you have to lose is time, which do you choose? $.31 or 5 minutes of extra time?
The above example may be simplistic, and it is, but it highlights how we, as consumers, make decisions. As for myself, I put a huge value on my own time. I enjoy doing whatever I want to do, whenever I want to do it, but I realize that comes at a cost. Frankly, with the recession continuing on, and money becoming tighter, I realize that I now value my time less, and shop around more than I used to.
Reality and Time Preference
One example of a changing time preference can be found in movie rental. Recently, I received a direct mail piece from a local movie rental store where I have a membership. Included were three coupons, one of which was for an entirely free rental, which I’ll be sure to enjoy. However, on the back of the mailer the rental store pitched the idea that you can rent movies at the movie store immediately that you’d have to wait 30 days for RedBox and Netflix to have.
That’s cool and everything. We all enjoy a little bit of “NOW.” But what about the practicality? Does it really make sense to drive 2 miles to pay 3x more to get a movie 30 days earlier? That’s up to you. Clearly, since this particular movie rental store is so desperately in need of customers (judging by their $25 late fee forgiveness coupon) they’re suffering from a change in time preference.
Time Preference and Academia
Time preference is usually described in academia for its effects on monetary policy/interest rate policy. Every time you borrow money to purchase something, you exhibit your time preference. Rather than save to make a large purchase, you borrow, indicating that you’re willing to pay more if you can have it now. The same goes for investors. If you’re investing for the future, saving money and buying up capital goods for future earnings, you show that you’re willing to wait in order to have more later. Time preference is critically important to the debt markets, and to investors and consumers alike. It’s a shame I squandered the idea on movie rental, but the point still stands, I guess.
