We've all heard it before
“Save now, enjoy later.” But what does that actually mean in terms of economics? Intertemporal choice is a theory in economics that helps us understand how people make decisions over time.
For example, people can choose to consume a good or service immediately or save it for later. This theory can help us better understand savings, investments, and consumption issues. So let's take a look at this concept and why it matters.
The Mechanics of Intertemporal Choice
Intertemporal choice is based on the idea that people's preferences and options can change over time. This means that people are willing to trade off some present satisfaction for the promise of greater satisfaction in the future. For example, someone might save money today to purchase a more expensive item down the road.
The Benefits of Intertemporal Choice
Intertemporal choice allows us to think about our financial decisions in terms of how they will impact our future selves and develop sound strategies for saving and investing. It also encourages people to think long-term rather than simply focusing on immediate gratification and short-term goals. Furthermore, intertemporal choice can inform policymakers when creating legislation around topics such as taxation, retirement planning, education financing, and more.
Intertemporal Choice in Everyday Life
It's easy to see how intertemporal choice applies when making big decisions like whether or not to invest in stocks. Similarly, it can be used to decide if we should pay off debt now or start saving for retirement. But intertemporal choice also applies on a daily basis; should you buy lunch out today or bring food from home so you can spend your money on something else tomorrow? Should you splurge on entertainment tonight instead of putting that money toward an upcoming vacation? Learning how to utilize intertemporal choice effectively can help us make wiser choices with our money daily by understanding the long-term implications of our spending habits.
In a Nutshell
Intertemporal choice is an important economic concept. Using it can help how people make choices over time when presented with different options for consuming goods and services immediately versus saving them for later use. By understanding this concept, we can better understand savings, investment, and consumption issues and develop strategies around responsible spending habits both now and into the future. In addition, an improved ability to plan ahead financially comes with an understanding of intertemporal choice—which is especially valuable during uncertain times like these.