Time Preference

Time preference refers to an individual’s preference to own an asset at an earlier date as opposed to a later one. Higher time preference indicates that time-to-ownership is more important. Time preferences for consumption leads consumers to borrow money to purchase goods before they earn enough money to pay for them upfront.

For example, when people buy houses with mortgages they are borrowing because they want to start living in the house right away. Financially, it is almost always superior to have ownership of goods or assets as soon as possible. However, this may not be the case for assets that are difficult or expensive to store.

Time preferences are highly related to the interest rates lenders charge borrowers. Time preferences affect the way investors weigh monetary payoffs. Cash flows in the far future are discounted more heavily than cash flows which will occur sooner.