I had just finished a waffle and scrambled eggs, and my five-year-old’s unfinished waffle was sitting on his plate.
It looked…delicious. I was sure that it would taste delicious, too. Every week, he decides to save about half of his waffle for later, but I knew that with enough cajoling, I could probably convince him to give me the rest.
This would have been a bad idea for two reasons. First, there’s the extra calorie count I’d be bringing upon myself by eating another half-waffle. It would be delicious, yes, but not consistent with my long-run health and wellness goals.
Second, my kids have been coughing a lot recently, fighting colds. “Don’t eat or drink after other people” is a good rule because it prevents germs from spreading. If I violated this rule, I would be sacrificing the future for the present. I decided — wisely, I believe — not to try to persuade my son to let me finish his waffle.
Risk Preference and Time Preference
This incident offers a case study of sorts in understanding people’s preferences and life outcomes. We refer to people’s willingness to incur future pain for present satisfaction as time preference. Someone with high time preference gives little thought to the future and indulges a taste for present satisfaction. Someone with low time preference gives a lot of thought to the future and is willing to delay gratification.Let’s assume, for the sake of argument, that my son would have been willing to let me have the rest of his waffle, perhaps in exchange for a dollar or two. The high time-preference move would have been to eat the rest of the waffle and enjoy present deliciousness even though I might end up sick later — or to convince myself that I was unlikely to get sick specifically from eating the waffle since I was already being exposed to his germs in so many other ways.
It’s not certain that I would get sick from taking the additional risk of eating after my coughing, sneezing son. This uncertainty illustrates another important fact about people’s preferences. Just as people have varying degrees of willingness to pay for present satisfaction, they have different degrees of willingness to bear risk. Some people are risk averse, which means they’re willing to pay a bit for security and certainty. Some people are risk loving, which means they’re willing to pay for thrills. People are generally mixes of both: risk averse in some circumstances and risk-loving in others. I may be risk averse when it comes to my health, but I’m more risk loving when it comes to research.
How to Be Wealthy and Healthy
What do risk aversion and time preference have to do with people’s life outcomes? People with low time preference tend to be healthier and wealthier in old age. As the old adage goes, “Good things come to those who wait,” and those who are willing to delay gratification by moderating their waffle consumption and saving instead of spending can take advantage of a lower chance of heart disease and diabetes and the power of compound interest over a longer time.
People with high time preference give relatively little thought to the future and live for today. They make the most of the present like they’re going to die young, and in the process they reduce their future selves’ standards of living — assuming they make it that far.
High time preference and high risk preference walk hand-in-hand, increasing these folks’ probability that they will, in fact, die young. Taking a lot of risk might mean a big win, but it might also mean a big loss.
Gambling and Investing
Think about someone buying lottery tickets or playing casino games. The world has quite a few lottery winners who became millionaires randomly. The world also has quite a few people who have lost everything because of a gambling addiction. These winners and losers both exhibited high time preference. The world has far more people who became millionaires slowly, over decades, by making thousands of small sacrifices and investing carefully, exhibiting low time preference.
And while the world does have people who live long, healthy lives despite overindulging in waffles and other goodies on a regular basis, it has many more people who suffer life-shortening and life-degrading consequences as a result of their high time preference.
Secure property rights, for example, are what make it possible for us to invest in the stock market and accumulate the wealth we need to retire. If we faced the risk of a government or company stealing the shares of stock we purchased, only the most risk-loving among us would invest, and those investments would often lose money.
My son might not be old enough to realize it yet, but he’s on the right path: he’s exhibiting low time preference by enjoying part of his breakfast treat in the present and saving some for the future. I would be wise to follow his example even when I’m not at risk of catching a cold — we all would.