Intertemporalchoices in behavioral economics is the study of how people make their choices andabout what and how much to do at some points in time, when making choices at atime affects the possibilities at other points in time. People have been habitsand preferences that formed in early ages and they can carry them into theiradulthood periods. In fact, they can have profound effects on making theirsocioeconomic decisions.
In order to clearly understand, people’s decisionsthat have consequences in various time periods are called as intertemporalchoices. Would you prefer to receive $1200now or $1800 after a year? Does this preference hold if the amount of money isdecreased or increased? Or can this preference change when your choice isbetween two goods of corresponding value? What happens to your decisionswhether to receive either two goods or your friend gets both of them? Why dosome people invest in education or save money while other do not? So, questionslike that are pivotal for intertemporal choice. Moreover, there are someeconomic research on intertemporal choices that culminated in Fishers theory ofinterest (1930) and Discounted Utility model in Samuelsons (1937). I willshortly summarize them to understand the topics in a better way.
Many decisions requiredecision-makers to interchange costs and gains at different points in time.Also, decisions of persons about savings, education, health care, and exerciseare some intertemporal choices. According to Dragone (2009), for example;should a person sign a contract for the job? The answer is that it relies onhow this person evaluates the impacts of being an employed on present time orfuture. Being employed brings some costs as well as benefits. On the one hand,the benefits include job satisfaction and goods and services that the salariesallows the people. But, it includes negative issues. For instance; peoplealways provide a good performance in the work, because of that workers have tostudy too much.
As the opportunity cost, people have to renounce their leisuretime. As a model for intertemporal choices, the theory ofdiscounted utility is the most common pattern in order to analyze it. Thistheory has been constructed to describe actual behaviors and socially optimumones, respectively, positive economics and normative economics. Dragone(2009) states thatthere are two popular models that avind similar structures but havingdifferent assumptions. They areexponential and hyperbolic discounting models. Their theoretical structure isthat people’s choices depends on their preferences and the assessment of analternative relies on the sum of the costs and benefits. Lastly, distantbenefits are less desirable than the closer ones. The main difference betweenthe models are discount function.
The former never changes his/her mind. wheninformation and choices is unchanged, s/he always does the best preference tohim or her. For the other one, an hyperbolic agent can be driven by temptationof present and can be time-consistent. This is the first time, inthe year of 1937, Samuelson proposed the intertemporal utility function whichis a generalized model of intertemporal choice that applicable to multiple timeperiods.
In this theory, intertemporal preferences depend on over consumption profiles like (ct,…,cT). And this preferences represented by an utility function Ut(ct,…,cT).