Question

What are "time preferences"? How is discounting commonly modeled? (Explain the terms in the model.) What are some examples of how discounting can be irrational? What are some example of how discounting can be rational?

Answer 1

Comparing the goods received at an earlier date with the goods that are received at a later date, this relative valuation is stated as time preferences.

Time preference or time discounting is a process of making a decision about a situation by the assigned value to something and finding how much duration.

Eg. Joe and Ria went for shopping and they purchased two tops each costs $ 20. But Ria forgot to take her purse and she asks Joe to pay for her and she'll return it in next week. Now, three days later she says either I'll pay you $20 next week or at the end of the month when I'll get pocket money, I'll give you $30.

In the eg. now its joe's decides to wait or to get extra amount and this is what time preference is about.

Now if Joe go for $20 in the upcoming week and deny for the offer for $30 then it is an example of Irrational discounting.

Which means actual value to get at the same time, as there might be a possibility that ria may forget about the deal later, so it's better to be in profit.

If Joe decides to get amount at the end of the month then that is counted as rational discounting. It facilitates decision making that may not the best return profit material.

**I was trying to upload an image of the model but encountered an error.