In economics, dynamic inconsistency, or time inconsistency, describes the situation: A decision-maker’s preferences change over time, in such a way that a preference, at one point in time, is inconsistent with a preference at another point in time. It is often easiest to think about preferences over time in this context by thinking of decision-makers as being made up of many different ‘selves,’ with each self representing the decision-maker at a different point in time. So, for example, there is my today self, my tomorrow self, my next Tuesday self, my year from now self, etc. The inconsistency will occur when somehow the preferences of some of the selves are not aligned with each other.
In the context of behavioral economics, time inconsistency is related to how each different self of a decision-maker may have different preferences over current and future choices. One common way in which selves may differ in their preferences is they may be modeled as all holding the view that now has especially high value compared to any future time. This is sometimes called the ‘immediacy effect’ or ‘temporal discounting.’ As a result the present self will care too much about herself and not enough about her future selves. Self control literature relies heavily on this type of time inconsistency, and it relates to a variety of topics including procrastination, addiction, efforts at weight loss, and saving for retirement.
More generally, humans have a systematic tendency to switch towards ‘vices’ (products or activities which are pleasant in the short term) from ‘virtues’ (products or activities which are seen as valuable in the long term) as the moment of consumption approaches, even if this involves changing decisions made in advance. A different form of dynamic inconsistency arises as a consequence of projection bias (not to be confused with a defense mechanism of the same name). Humans have a tendency to mispredict their future needs by assuming that they will remain at present levels. This leads to inconsistency as marginal utilities (for example, tastes) change over time in a way that the individual did not expect. For example, when individuals are asked to choose between a piece of fruit and an unhealthy snack (such as a candy bar) for a future meal, the choice is strongly affected by their current level of hunger. Individuals may become addicted to smoking or drugs because they underestimate the diminishing returns of these habits (such as craving for cigarettes) once they become addicted.
In a game theory context, an announced government policy of never negotiating with terrorists over the release of hostages constitutes a time inconsistency example, since in each particular hostage situation the authorities face the dilemma of breaking the rule and trying to save the hostages. Assuming the government acted consistently in not ever breaking the rule, it would make it irrational for a terrorist group to take hostages. (Of course, in the real world terrorists might not act rationally.) Government policy makers also suffer from dynamic inconsistency with reference to inflation expectations, as they are best off promising that there will be lower inflation tomorrow. But once tomorrow comes lowering inflation may have negative effects, such as increasing unemployment, so they do not make much effort to lower it. This is why independent central banks are believed to be advantageous for a country: their independence frees them to only worry about making decisions for the greater good, not to keep government policy makers popular.
One famous example in literature of a mechanism for dealing with dynamic inconsistency is that of Odysseus and the Sirens. Curious to hear the Sirens’ songs but mindful of the danger, Odysseus orders his men to stop their ears with beeswax and ties himself to the mast of the ship. Most importantly, he orders his men not to heed his cries while they pass the Sirens; recognizing that in the future he may behave irrationally, Odysseus limits his future agency and binds himself to a commitment mechanism (i.e. the mast) to survive this perilous example of dynamic inconsistency. This example has been used by economists to explain the benefits of commitment mechanisms.
A curious case of dynamic inconsistency in psychology is described in 1999 study in which subjects were offered free rentals of movies which were classified into two categories – ‘lowbrow’ (e.g. ‘The Breakfast Club’) and ‘highbrow’ (e.g. ‘Schindler’s List’) – and researchers analyzed patterns of choices made. In the absence of dynamic inconsistency, the choice would be expected to be the same regardless of the delay between the decision date and the consumption date. In practice, however, the outcome was different. When subjects had to choose a movie to watch immediately, the choice was consistently lowbrow for the majority of the subjects. But when they were asked to pick a movie to be watched at later date, highbrow movies were chosen far more often. Among movies picked four or more days in advance, over 70% were highbrow.
People consistently report that they believe they will have more time in the future than they have today. More specifically, there is a persistent belief among people that they are ‘unusually busy in the immediate future, but will become less busy shortly.’ However, this ‘time slack’ is shown to be a bias. However busy you are this week is generally representative of how busy you are in future weeks. When people are estimating their time and when deciding if they will make a commitment, they anticipate more ‘time slack’ in future weeks than the present week. Experiments in 2005 on this topic showed that people tend to discount investments of time more than money. The authors have nicknamed this the ‘Yes…Damn’ effect because of the tendency to agree to do things in advance (e.g., travel to a conference), but when the time arrives you are very busy and it is inconvenient to attend.
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