Question:Which scenario represents time inconsistency?
You prefer receiving $2 on January 1 of this year to...
Question
Which scenario represents time inconsistency?
You prefer receiving $2 on January 1 of this year to...
Which scenario represents time inconsistency?
You prefer receiving $2 on January 1 of this year to receiving
$1 on January 2 of this year, and you prefer $2 on January 1 of
next year to $1 on January 2 of next year.
A person prefers $80 today to $100 one year from now but
prefers $100 in six years to $80 in five years.
A person prefers $100 in one year to $80 today but prefers $100
in six years to $80 in five years.
The scenario in which a person prefers $80 today to $100 one
year from now but prefers $100 in six years to $80 in five years is
said to time inconsistent.
Time inconsistency is said to occur when a person makes a
choice which seems to give him more utility at present but when his
preference changes over time, his choice becomes inconsistent.
Here in this scenario,a persons decision is said to be time
inconsistent because both the preferences has the same difference
that is $20 and one year. so, it will be better if that person
chooses either $80 or $100.
But here as he/she has different preferences at different time,
his decisions are said to be time inconsistent.