time inconsistency

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In utility theory, the principle that an individual's economic preferences may vary over time, sometimes in ways that do not accord with simple views of his or her rational self-interest. For example, if on 1 January 2000 a man was asked to choose between receiving £10,000 on 1 January 2010 or £10,500 on 1 July 2010, it seems almost certain that he would opt for the larger sum. However, if the same man was offered the same choice on 31 December 2009 the prospect of receiving an immediate £10,000 might be too attractive to resist. Time inconsistency is of major interest in the field of behavioral finance. At the macroeconomic level, it has been used to explain inflationary bias and to argue for a rules-based approach to monetary policy (see rules versus discretion).

Subjects: Financial Institutions and Services.

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