Intertemporal Choice

An intertemporal choice refers to those decisions made on a daily basis involving choosing between available different outcomes at various points in the future. It is vital in finance and economics as it impacts business and personal decisions, affecting quality of life and financial opportunities. 

It shows that people are more inclined to present smaller rewards & outcomes and have the tendency to discount future, more significant outcomes & incentives. It comprises selecting options concerning healthcare, nutrition, education, exercise, savings, and work effort so as to strike a balance between their long-term goals and urgent needs.

Intertemporal choice represents a field of research related to people assigning comparative value to rewards or payoffs at various milestones in the future. It depends on selecting the best balance between benefits and costs at various points. The concept has always been studied in relation to behavioral economics, in which it was found that individuals do not entirely depend on the current value of probable future benefits to make rational decisions. It involves many decisions made now that impact future possibilities, especially about saving habits and spending on people. 

Intertemporal choice in microeconomics studies the manner in which people assign resources to various periods to balance future and immediate consumption. It also takes help from Fisher's intertemporal choice model and Fisher's theory of optimal intertemporal choice. Such models and theories help explain different economic behaviors or individuals related to investing, lending, borrowing, saving, and spending.

Businesses and individuals have to make selections regarding existing consumption against savings that keep affecting future monetary opportunities. Additionally, current savings reduce current utility but will enhance future consumption. Present bias commonly affects choice, which leads to the prioritization of immediate gratification against long-term objectives that potentially impact overall wealth accumulation and retirement savings.  

This understanding has helped a great deal of companies and individuals make informed and wise decisions concerning investing, saving, and spending to balance future needs with present desires. It has a profound impact on economic behavior, ranging from corporate investment strategies to personal finances. Hence, it shapes retirement corpus and wealth accumulation in the corporate world and personal lives. 

One can find numerous factors affecting this choice, such as:

• Many people have different tastes for current consumption, which is in contrast with future consumption, which is affected by cultural values, impulsiveness, and risk aversion.
• A high degree of wealth and income influences decisions about intertemporal consumption, leading to higher current consumption or more savings. 
• The opportunity cost related to existing consumption against future savings gets affected by interest changes, thereby impacting such choices.
• Any probable income alteration, positively or negatively expected in the future, alters current durable goods consumption decisions. 
• Any anticipated change in inflation rates in the future influences the money's purchasing power, impacting decisions of intertemporal consumption.

Let us use a few examples to understand the topic.

Example #1 

An online research paper published in August 2022 discusses the impact of a lack of options and resources on intertemporal choice centered on life insurance trust. A group of researchers conducted the research by studying and analyzing data collected from the Federal Reserve Bank of Philadelphia. Moreover, the study also included five studies comprising 7,728 participants.

After the analysis was over, the results pointed out that the scarcity's impact on intertemporal choice differed with respect to the length of time of need. This means that if a person has urgent needs that are endangered by scarcity, then they would go for smaller and quicker outcomes. On the other hand, for a person with long-term needs, the effect is diminished. As a result, the study successfully challenged the idea that uniform scarcity leads to impulsive decisions, but decision-making depends on the urgency of the need.

Example #2

Let us assume that a student, David, receives a $100 note from his father on his birthday. However, he went into a dilemma as he faced an intertemporal choice – he could either spend the money on a new mobile game now or go for saving it towards a $150 camping adventure in two months. Now, if David feels that he has a scarcity of mobile games due to peer pressure to join online mobile gaming, then he might choose to abide by the instant gratification of mobile games. 

On the contrary, if he feels that a camping adventure would be more interesting and exciting than mobile gaming, then he would value camping more and save money for it. Thus, a sense of urgency decides the decision-making to choose between immediate versus delayed rewards.

It faces multifaceted challenges that can be listed as various points:

• The most critical challenge is the present bias forcing individuals to choose immediate fulfillment over long-term rewards like spending now without considering future scenarios.
• Another crucial one is that people tend to discount future benefits in exchange for valuing immediate incentives instead of future ones, resulting in bad choices and outcomes. 
• Many people with disability have less self-control over immediate gratification than valuing future long-term goals and benefits due to immediate temptations.
• Generally, future predictions have an uncertainty element that discourages people from accounting for making correct decisions and, thus, making risky decisions.
• People have different approaches to taking long-term risks over minimum risk or zero risk at present, curtailing their ability to execute the best choices.
• Individuals tend to fall for cognitive biases like sunk cost fallacy and availability heuristics, misguiding them with incomplete or false information to make suboptimal decisions.
• Many have a high emotional quotient that blurs the importance of long-term interests and willingly take sides with instant satisfaction to make irrational judgments not in their interests and well-being.