ABSTRACT

Standard economics assumes that people are consistent when they plan their decisions over time. For a rational, consistent person it should make no difference whether they are choosing between something today versus tomorrow, or between something in a year versus a year plus a day. In macroeconomics, Friedman’s permanent income hypothesis and Modigliani’s lifecycle hypothesis both postulate that people plan consumption over their lifetimes and so their decisions about the future should not change unless information changes. However, ordinary observation tells us that few people are able to plan consistently and/or over long time horizons, and one of the major contributions from behavioural economics comes in theories and principles that capture time inconsistency and preference reversals. People change their minds. They aren’t necessarily very good at making decisions today about choices with consequences for the future, and they are prone to temptation and procrastination.