Question

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.
	You value $1 today more than $1 tomorrow.

Answer 1

Option B.

• 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.