What Is Intertemporal Choice?
Let me explain intertemporal choice to you—it's an economic term that covers how the decisions you make right now shape the options you'll have down the line. In theory, if you hold back on spending today, you could end up with a lot more to spend in the future, and the opposite holds true if you splurge now.
Key Takeaways
You need to know that intertemporal choice deals with decisions like your spending habits that happen soon and can change what financial paths open up later. The idea is that skipping consumption today might let you consume a whole lot more tomorrow, while going all out now could limit your future. Often, people lean toward choices that satisfy their immediate needs and wants, even if it means fewer options later.
Understanding Intertemporal Choice
Many choices you make today will ripple into your future. For example, figuring out how much to spend now versus how much to save can seriously affect your quality of life both immediately and years from now.
For businesses, this shows up in investment decisions that involve intertemporal choice. But for you as an individual, it's mostly about saving and planning for retirement.
If you save today, you're consuming less right now, which drops your current satisfaction. But over time, those savings build up, letting you buy more goods later and boosting your future satisfaction.
Most people face budget limits that stop them from spending as much as they'd like. Still, experts in behavioral finance point out that present bias is widespread—you probably prefer to spend now, no matter how it hits you later on.
Important Note
It's typical for people to pick intertemporal choices that handle short-term needs and wants instead of aiming for long-term goals.
Intertemporal Choice Example
Suppose you make a huge purchase, like funding a world tour that blows your budget and needs extra loans to cover it—this could hit your long-term wealth hard. You might grab a personal loan, max out your cards, or even dip into retirement savings if you can.
That choice would cut into the money you have for ongoing retirement savings. You could end up needing extra income sources to make up for the lost assets.
Things get worse if something unexpected cuts your current income, like losing your job, making it tough to recover from those costs and keep saving for retirement. If you bought big and then got laid off, your choices plus those outside factors would reshape your future options.
Maybe you aimed to retire at a specific age or were close to paying off your mortgage. A drop in assets might force you to delay retirement or get a second mortgage to manage the pressing problems.
Other Types of Intertemporal Choice
Your job decisions can also play into intertemporal choices. Say you're offered two jobs with salaries that differ based on the role's intensity and demands.
One might be high-stress with long hours, but it pays more than usual for that kind of work.
As an intertemporal choice, taking that tough job could open up better pension options later. On the flip side, choosing the lower-paying job with better work-life balance might leave you with fewer retirement choices and less money set aside.
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