Definition
Time preference is an individual's disposition to weight present outcomes relative to future outcomes when comparing them; higher time preference means the future is discounted more steeply and present consumption is valued more strongly against future consumption of equivalent magnitude.
Why it matters
Time preference is a foundational parameter in retirement income analysis because retirement income decisions are trade-offs between present and future consumption at a horizon of decades. The rate at which an individual discounts future outcomes shapes the perceived cost of an arrangement that trades a lump sum today for income later, and it shapes the evaluation of longer versus shorter deferral. Behavioral research documents patterns of time preference that classical exponential discounting does not capture.
How it works
Classical models represent time preference through an exponential discount function: outcomes at future dates are discounted by a constant per-period rate, producing a smooth exponential curve. Under exponential discounting, preferences are time-consistent, meaning the choice between an outcome at one future date and an outcome at a later future date does not depend on when the choice is made. Behavioral research has documented systematic deviations from this pattern. Present bias, also called quasi-hyperbolic discounting, captures the observation that individuals discount the immediate future much more steeply than the distant future, producing time-inconsistent preferences: a choice made today about a trade-off between two future dates can be reversed once one of those dates becomes today. Hyperbolic discounting generalizes this pattern into a smooth function that flattens with increasing horizon. Empirical work in behavioral economics since the 1990s has estimated hyperbolic and quasi-hyperbolic parameters across many populations, though the estimates vary considerably with elicitation method.
In practice
For an individual approaching lifetime income decisions, time preference is one lens on the felt cost of arrangements that trade present capital for future income. A deferred income annuity that trades present capital for income starting years in the future is a structurally different offer for individuals with different time preference parameters, and it is a different offer for the same individual at different points in their lifecycle. A useful practice is to separate the structural analysis of the arrangement (its cost of income, its realized value, its deferral multiplier) from the individual's own time preference, and to make the trade-off explicit rather than absorb it into the analysis. Asking a professional to describe an arrangement's cash-flow shape without embedding a discount rate, and then discussing time preference as a separate layer, is a useful sequencing.
Related terms
- Present bias
- Hyperbolic discounting
- Deferral multiplier
- Cost of income
- Prospect theory
- Ergodicity
- Solo drawdown