Fisher’s Time Preference Theory
Fisher emphasizes the fact of “time preference” as the central point in the ‘Theory. Individuals prefer present satisfactions to equally certain future satisfactions. They are thus impatient to spend their incomes now. The degree of impatience depends upon the size 9f the income. the distribution of income over time, the degree of certainly regarding enjoyment in the future and the temperament and the character of the individual. Thus. people with larger incomes are likely to have their present wants more fully satisfied and will thus discount the future at a lower rate than poorer people. As regards distribution of income over time, three kinds of situations may be imagined. The income may
be uniform throughout one’s life. or increase with age. or decrease with age. If it is uniform, the degree of impatience to spend (i.e., the rate of discounting the future) will be determined by the size of the income and the temperament of the individual. If the income increases with age, it means the future is well provided for, and the tendency will be to discount the future at a higher rate. If the income decreases with age, the converse will be true, i.e., the future will be discounted at a lower rate.
As for the degree of certainty, it is clear that the greater the certainty of future enjoyment of income the smaller the degree (If time preference or the rate of discounting the future, and vice-avers. Finally, the character of the individual will also influence this time preference. man (If forethought will discount the future at a lower rate compared with a spendthrift. The rate of lime preference is also influenced by expectation of life. If a man expects to live long, his preference fur purchasing power in the present will be comparatively low. Similar will be the case of a man who desires to leave behind a handsome patrimony. The rate of time preference of an individual also depends on the proportion of his income that he is asked to lend. The larger the amount of loan, the higher must be the rate of interest, because it entails a greater sacrifice of liquidity on the part of the lender. Thus, the rates of individual time preference, after having been determined in this way, tend to become equal to the rate of interest. An individual with a higher rate of time preference.compared with the market rate of interests tends to borrow money in order to satisfy his more pressing wants. If his rate of time preference is lower than the market rate of interest, he will end to the market and make a gain thereby. TIIUS,the individual will vary his income-stream hy burrowing
or lending. This process will tend to coulis the rate of interest with the rate of time preference,