THE ECONOMICS AND PSYCHOLOGY OF TIME

Based on a talk by Professor Daniel Read, WBS, at the recent A Symposium on Time event

Do humans want results now or are we prepared to delay our gratifications until later? Does the way we describe time affect our decisions and choices? These are two questions Professor Daniel Read, Warwick Business School, covered in his recent lecture about his economics and psychology of time preference research. The article is the first in a series we will be publishing from the recent Symposium on Time event.

Intertemporal choices are those between outcomes that occur at different times. “It’s usually a trade off between smaller-sooner and larger-later outcomes” says Prof Read. Dessert now or be slender later in life? Buy a big screen TV or save the cash for a bigger pension on retirement? Start work and earn an immediate income or carry on with education and receive a larger income later on? The empirical question was some money now or more money later.

“People are impatient, they like to have things now rather than things later” Prof Read observed during his behavioural economics research. The concept of time discounting is where future outcomes are valued less than current ones. Yet why discount the future at all? The utility function is Darwinian fitness, explains Prof Read. It comes down to maximising children. “If £1000 can make one child now or half a child in one year, then you need £2000 to wait one year. According to this principle young adults discount more because they get more fitness per unit of resource.”

How much would you demand in two years in exchange for giving up £100 today? Common answers in experiments from those who chose to take the money now included "I need the money now” and “I am impulsive and ten years is a long time to wait”. These answers are wrong. Prof Read says we should choose by looking at the opportunity cost of money. If you took £100 now how much could you earn by saving or investing it? Is it more or less than the sum being offered?

A related experiment on time inconsistency by Reed and van Leeuwen (1998) asked people to choose what snack they would like to eat in a week – fruit or chocolate. The majority, 74 per cent, of people chose fruit. A week later the group was asked the same question with one important difference – the fruit or chocolate was to eat immediately. This time 70 per cent chose the chocolate. The ‘frame’ of the question affects choice and decision. In his work Prof Read has found that:

• the choice context cues memory, attention and perception and thereby influences the impact of choice relevant features
• ‘framing effects’ occur when this influence changes choice behaviour
• how we describe choice options influences our preferences.

What might influence our choice between X now and Y later? Many variables include the length of the interval and the subject’s current financial status and prospects. Yet a minimal design change, or ‘nudge’, can produce large framing effects. Compare the following choices:

1. £100 or £150 in a year

2. £100 or receive 50 per cent more in a year

3. £100 today or receive £150 (insert date a year from now).

Which would you choose? Prof Read’s research has shown that reminding people of the opportunity costs instils in them more patience to wait.

There’s also an unresolved puzzle. People judge time as further away when it is described as age rather than units of time. This is a phenomenon that marketing managers use to their advantage to influence our choices.

Listen to Prof Read’s full talk below.

A summary of the aims of the Symposium on Time event is now available.

Daniel Read is Professor of Behavioural Science at Warwick Business School. He received his PhD in Psychology from the University of Toronto in 1991, and then spent time as a postdoctoral fellow at Carnegie Mellon University, where he collaborated with the Department of Social and Decision Sciences and learned to be a behavioural economist. Since then, he has held positions at University of Illinois: Urbana Champaign, University of Leeds, London School of Economics, Durham University Business School, and visiting positions at INSEAD, Yale School of Management, and Rotterdam Business School. Professor Read has consulted for the UK government and the FSA on many aspects of behavioural economics.

By Penelope Jenkins