Time-Preference Theory Of Interest


DEFINITION of 'Time-Preference Theory Of Interest'

A theory that examines the nature of consumerism, and the factors that influence consumers to delay current consumption or expenditures in anticipation of greater future returns. The rate of time preference itself can be quantified as the amount of money required to compensate the consumer for foregoing current consumption. This theory also attempts to tie interest rates into the equation by comparing the perceived value of expected future returns with the rate of interest paid on current savings.

BREAKING DOWN 'Time-Preference Theory Of Interest'

This theory was initially constructed in 1871 by Carl Menger, an Austrian economist. This theory also stipulates that the consumer's rate of time preference, and therefore the interest required, will probably rise as the consumer's savings increase. This means that the consumer is likely to restrict his or her savings to a level at which the rate of time preference equals the rate of interest paid on savings.

  1. Interest

    The charge for the privilege of borrowing money, typically expressed ...
  2. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  3. Neoclassical Economics

    An approach to economics that relates supply and demand to an ...
  4. Monetary Theory

    A set of ideas about how monetary policy should be conducted ...
  5. Austrian School

    An economic school of thought that originated in Vienna during ...
  6. Elastic

    A situation in which the supply and demand for a good or service ...
Related Articles
  1. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  2. Fundamental Analysis

    What Is the Quantity Theory of Money?

    Take a look at the tenets, assumptions and challenges of monetarism's principal theory.
  3. Options & Futures

    Financial Concepts

    Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear.
  4. Active Trading Fundamentals

    Dow Theory

    Learn about the foundation upon which technical analysis is based.
  5. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  6. Investing Basics

    Why Interest Rates Affect Everyone

    Learn why interest rates are one of the most important economic variables and how every individual and business is affected by rate changes.
  7. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  8. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  9. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  10. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  1. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  2. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  3. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  4. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  5. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
  6. What is a negative write-off?

    A negative write-off is a write-off conducted by a company or accountant after deciding not to pay back an individual or ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
Trading Center