Time-Preference Theory Of Interest

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Interest

    1. The charge for the privilege of borrowing money, typically ...
  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. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
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. Economics

    How do you quantify price elasticity?

    Learn how to calculate the coefficient for price elasticity, enabling you to approximate how sensitive supply and demand variables are to changes in price.
  6. Fundamental Analysis

    What's the difference between r-squared and correlation?

    Discover how R-squared calculations determine the practical usefulness of beta and alpha correlations between individual securities and aggregate indexes.
  7. Economics

    What are the major costs to a firm when pursuing vertical integration?

    Following a vertical integration, there are initial setup costs and additional administrative costs as well as other costly complications.
  8. Economics

    How do I differentiate between micro and macro economics?

    Differentiating between microeconomics and macroeconomics is primarily concerned with the difference of the scales of the subjects under study.
  9. Economics

    When does vertical integration reduce transaction costs?

    Trading is not just based on supply and demand, but negotiations between companies. Vertical integration can eliminate this source of uncertainty.
  10. Economics

    What is general equilibrium theory in macroeconomics?

    Achieving equilibrium of prices in a single or multi-market setting involves a bidding process that is informed precisely by demand.

You May Also Like

Hot Definitions
  1. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  2. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  3. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  4. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
Trading Center