Intertemporal Choice

Published Oct 25, 2023

Definition of Intertemporal Choice

Intertemporal choice refers to the decision-making process when individuals or societies have to choose between options that offer different benefits or costs at different points in time. It involves evaluating the trade-offs between present and future outcomes and making decisions that maximize overall well-being over time.

Example

To better understand intertemporal choice, let’s consider the example of saving money. People often face the decision of whether to spend their money immediately on current wants and needs or save it for future goals or emergencies. Choosing to spend money now may provide immediate gratification, but it means sacrificing potential savings for the future. On the other hand, choosing to save money can provide security and financial stability in the long run, but it requires delaying immediate consumption.

For instance, Sarah receives a bonus at work and has to decide between spending it on a shopping spree or putting it into her savings account. If Sarah values the immediate satisfaction of shopping more than the potential future benefits of saving, she may choose to spend the money now. However, if Sarah values financial security and long-term goals more, she may decide to save the money.

Why Intertemporal Choice Matters

Understanding intertemporal choice is crucial for individuals, businesses, and governments to make informed decisions about their financial planning, investment strategies, and resource allocation. It helps individuals prioritize their goals, balance short-term desires with long-term benefits, and make choices that align with their values and objectives.

For businesses, intertemporal choice plays a role in decisions related to investment, expansion, and pricing strategies. They must weigh the immediate costs and potential future benefits of their actions to maximize profitability and sustainability over time.

Governments also consider intertemporal choice when designing economic policies and public investments. They must balance current needs and demands with the long-term well-being of society, taking into account factors such as infrastructure development, education, healthcare, and environmental sustainability.