What is an Intertemporal Choice
Intertemporal choice is an economic term describing how an individual's current decisions affect what options become available in the future. Theoretically, by not consuming today, consumption levels could increase significantly in the future, and vice versa.
BREAKING DOWN Intertemporal Choice
For individuals, these decisions relate more to saving and retirement, while for firms, various investment decisions involve intertemporal choice. For example, an individual who saves today consumes less, causing his or her current utility to decline. Over time, the savings grow, increasing the number of goods the individual can consume and, therefore, the person's future utility.
Ways a Short-Term Intertemporal Choice Can Affect Long-Term Opportunities
Individuals tend to be limited by budget constraints that prevent them from consuming to the extent of their desires. A preference for focusing on current consumption leads many individuals to make intertemporal choices that accommodate near-term needs and wants.
If an individual makes an exorbitant purchase, for instance, pays for an around-the-world vacation that exceeds their usual budget and requires additional financing to cover, this could have a substantial impact on their long-term wealth. They might take out a personal loan, max out credit cards, or even withdraw funds from retirement accounts in order to cover the expense.
Making such a choice would reduce the assets they have available to continue to save for their retirement. They may have to fund supplemental forms of income to augment their salary to make up for the decline in their assets.
This could be further exacerbated if unforeseen events affect their current income. A sudden loss of employment, for example, would make it difficult to recoup recent expenses and set aside funds for retirement. If the consumer made a sizable purchase and then was laid off, his or her intertemporal choices, combined with those external factors, stand to change their future opportunities.
Perhaps they planned to retire by a certain age or were on track to finish paying off a mortgage. The shortfall in assets could mean postponing retirement or taking out a second mortgage to help deal with the more immediate issues.
Decisions on employment can also factor into intertemporal choices. A professional might be presented with job opportunities with different salaries based on the intensity and demands of the job. One position may be high-stress with long hours required. The compensation might also be higher than what is standard for such a position. As an intertemporal choice, taking such a job might allow for more options on later retirement plans. Conversely, taking a job that offers a lower salary, but a better work-life balance may mean having fewer retirement options with less funding available.