Time Preference: Why I Choose Cancer

by JT McGee

Wealth is a function of time.  Time preference is key to personal finance.I like food that is quick and easy.

Naturally, I have a thing for microwavable meals. Smart Ones’ 3-Cheese Ziti Marinara are pretty awesome, especially since they take about three minutes from start to finish.

Smart Ones is a brand by Weight Watchers, which means I usually top it off with a turkey sandwich or something for lunch because I’m not really trying to lose weight.

I like ‘em because they’re quick, not because they’re low calorie small portion sizes. The turkey sandwich is good to keep me full, and add a little extra protein to my diet. OM NOM NOM.

”That’s not good for you!”

My mom likes to grill me for how I choose to cook my Smart Ones. They come in a plastic package, which you put directly into the microwave for quick cooking. She insists on taking them out of the package and putting the frozen block of spaghetti on a plate.

That’s too much work for me. It doesn’t fit in my schedule, and frankly, without the plastic it takes way too long to cook. I eat these things because it’s easy, not because it’s healthy.

Time Preference in our lives

Time preference is an economic term that describes our preference in making decisions that concern time. Essentially, time preference is the “discount rate” for all kinds of decisions.

I don’t have much patience when it comes to food. Therefore, I choose a heavy discount rate in my thinking process. The long-run cost of cooking something in plastic is not large enough to me to extend my cooking time on each microwavable meal I consume, even if the cost is an increased likelihood of cancer. Here, I have a very high time preference.

But, when it comes to my finances, I have a low time preference. I’m more than willing to wait for things I want. Because I have a low time preference, I shop on Amazon to save a few bucks, even if it means I have to wait 2 days to receive it. I also favor a long term investment strategy that emphasizes total returns over beating volatility.

Examples of time preference

Netflix and Redbox are another great example of time preference. Whereas Netflix will mail you a movie in two days, Redbox is open 24/7 and right down the street. People with a high time preference would prefer to drive to Redbox, where they can have their movie in their hands immediately. Others would prefer use their already existing subscription to Netflix to wait it out. I know a ton of people who have Netflix DVD subscriptions who still have a high enough time preference that they go to Redbox all the time.

Finally, we have the most prevalent example of time preference. People with a high time preference are more likely to succumb to high interest debt on their credit cards because having something in hand today is worth more than saving for it. If the choices are pay for something with saved cash in the future, or pay for something with a credit card today, most people choose to pay with a credit card and make payments over time.

They’re essentially saying that they’d pay the credit card interest rate so as to have something today rather than the future.

Time Preference & Morality

There’s a guy in my city who operates a “rent an anything” chain of stores. You know, those stores where you can finance virtually everything? He probably has a net worth in the eight figures.

A lot of people would say that his business is immoral. He sells financing on anything to people who don’t understand what they’re getting. I’m sure this is partly due to the fact that he has tons of money that he’s made from a chain of stores that sells overpriced stuff to people who don’t have any money. Honestly, I don’t buy it. He sells stuff to people who know exactly what they’re getting.

His customers, who are likely poorer than average, are poor because they have a high time preference. They would much prefer pay $1,000 for a $500 TV over the course of 12 months than pay $400 six months from today with savings. His customers are not poor because of his product. They’re poor, in my view, because they have a high time preference. If you have any amount of patience whatsoever, it’s so easy to become rich.

“But people don’t read those rental contracts!” Yeah, exactly, because they have a high time preference. Otherwise, it would be worth even an hour of time to read the contract to find out what you’re getting. But even an hour investment is too much for people with a high enough time preference to visit Rent-A-Center style stores.

Having a high time preference is the surest way to become poor. Everyone knows it. Everyone realizes it. Few people have the willpower to reject their inner spending devil. That’s not my problem. That’s not his problem. If his business didn’t exist, his customers would just find another way to pay high interest on consumer purchases. He’s just smart enough to realize that people will pay more for time than they will any other product.

I’m fascinated by time preference. We can say all day that the key to personal finance is spending less than you make. I disagree. I think the key to personal finance is having a low time preference—having the ability to delay pleasure today in order to have more pleasure (or cheaper pleasure) in the future.

You can “spend less than you make” in the present, but ultimately it is our choices that enable us to spend less than we make. My decision to cook a microwaveable meal in plastic is non-monetary, however, it is possible that my decision could negatively impact my finances in the future due to higher medical bills.

This article is partly inspired by a post titled “What are the differences between the rich and poor?” on GetRichSlowly. If only that site weren’t filled with a bunch of whining in the comment section, I probably would’ve put this in the comment section.

Readers,

What do you think? Can you blame someone who owns “rent something at high interest” stores?

Do you think time preference is as important as I do?

Photo by: pasukaru76

{ 5 comments… read them below or add one }

PKamp3 November 14, 2011 at 10:38

And if you can’t fight your time preference, at least be cheap about it!

My guard goes up any time I hear someone describe a business as ‘moral’ or ‘immoral’.
Usually, you hear multiple arguments on both sides of the same issue – it’s immoral for credit cards to charge xx% (pass a law) and after the law passes, it’s immoral that some people have no access to credit cards. They move to payday loans. Then payday loans are immoral. They lose access to those? Loan sharks. Where are we headed?

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JT McGee November 14, 2011 at 10:59

Yeah, exactly.

Where are we headed? Good question. I’d say we’re headed down a long road of central economic planning. It’s almost humorous that in no more than two generations we’ve gone from McCarthyism and complete rejection of the ideals of central economic planning to the acceptance of central economic planning. That’s not to say that McCarthyism is a good thing–not at all–it’s just funny how quickly tides turn.

I’m sure we agree on what is or isn’t immoral, especially as it relates to business. If people want something, even something as “awful” as payday loans, then let them have it. You can’t legislate responsibility.

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PKamp3 November 14, 2011 at 11:20

Oh I know – we’ve defended them in the past, although it wasn’t the gist of the entire article. Maybe you should write one? “Why Payday Loans Aren’t Immoral”, heh. You know I’ll come and agree!

Your favorite – the EITC – is in there too. I think my cowriter is way less pumped about it than me, though!

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krantcents November 14, 2011 at 21:49

Whether Smart Ones is good or bad, I just do not find them satisfying. There fore all the other crap I eat because of that it is bad for me. The rent a center is responding to the demand. If you could satisfy the demand without ripping off the customer, it would be great. Unfortunately, there is a risk in this market and you need the high profit to match the risk.

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LaTisha November 15, 2011 at 09:14

Quit eating that microwave death! lol
You actually shouldn’t be using the microwave at all, or holding your cell phone to your ear, or looking straight into the eyes of Lady Gaga. You will die a slow and painful death.

Ok, I’m serious now. The people who should be patient to wait and save money aren’t and the people that can afford to waste some time will wait for the cashier to break a new penny roll because there wasn’t enough change to get every penny they were owed. (It’s the principle.)

Have you had a chance to see In Time? I’m sure you’re a huge Justin Timberlake fan and all 🙂
But I feel like that movie has a finance message in disguise and it was made to wake people up! People are poor or rich because of choices. We were all born with 24 hours in the day. How you spend them is your choice.

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