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What is an Intertemporal Choice?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 November 2016
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    2003-2016
    Conjecture Corporation
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Intertemporal choice is a term used in economics to describe the impact of decisions made today on the type of options that are available in the future. This type of choice is found in not only the management of an individual’s financial resources, but also in the decisions made by corporations in terms of purchases and consumption. The idea is to accurately predict the outcome of the intertemporal choice and decide if that effect on the future is positive or negative.

One of the basic concepts of intertemporal choice has to do with consumption. Essentially, the idea is that if consumption does not take place today, there is a good chance it will take place tomorrow. Assuming that prices for the goods consumed will be lower tomorrow, it may be in the best interests of the consumer to forego purchases today and buy goods and services tomorrow when the prices have decreased. As with most economic decisions, this does represent some risk since the prices may simply remain at the same level or even increase if unforeseen factors occur that impact the demand for those products.

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Along with being concerned with when consumption takes place, intertemporal choice is also concerned with what is done with the resources that would have been used in the consumption process. For example, an individual may decide that instead of buying a house today, he or she will invest money in some type of interest-bearing account. Ten years later, the funds are withdrawn to purchase a home as a significantly lower rate. In the interim, the outcome of that consumer decision is that the deposited funds earned interest that made it possible to pay more of the purchase price, resulting in a lower amount of financing. In this scenario, consumption is not only delayed for a time, but the resources that would have been used early on are grown, making it possible to gain more benefit or utility once the purchase is made.

The idea behind intertemporal choice is to obtain the most benefit from consumption. By determining if the personal consumption expenditures will provide greater returns today rather than tomorrow, it is possible to time the consumption to best advantage. Failure to consider all relevant information may result in inaccurately predicting the outcome and ultimately causing the consumer to obtain less satisfaction from the transaction. For this reason, it is important to consider as many possible outcomes before making a final decision.

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