ANOMALIES: INTERTEMPORAL CHOICE, OR WHY ECONOMISTS CAN NEVER PREDICT WHAT IS GOING TO HAPPEN
Loewenstein and Thaler (1989) were particularly concerned with anomalies associated with intertemporal choice. The term "intertemporal choice" refers to decisions made by people in relation to actions where either or both the costs and benefits associated with the decision are spread out across time (Loewenstein & Thaler, 1989).
By way of illustration, a person may make a conscious decision not spend money on something they want today so that they can save money to buy something that they want even more at a later date. Two important economic theories are involved in a decision choice that spans time periods from the present to a future date.
The first theory is expected utility theory (Machina, 1987). Thus, person considering the purchase of a new home theatre system may be able to acquire such a system for the $1,000 that he or she is capable of spending today. This $1,000 system, however, may not have all of the bells and whistles that the person really wants in a home theatre system. The person knows that for $5,000 he or she can get the home theatre system that he or she really wants. There is a major difference in the utility (pleasure translated into a value) that the person expects from the two home theatre systems. To save the additional $4,000 required for the preferred home theatre system, however, will take time. It is at this point that a second economic theory affecting intertemporal choice becomes relevant.
The second theory is discounted utility theory (Fisburn & Rubenstein, 1982). This theory, among other things involves the time value of money, e.g., money in had today is worth more in terms of what it will buy today than the same money will be worth in terms of what it will buy a year from now or four years from now or on any future date. A simple way to conceive of this concept is to consider the ti...