Time Inconsistency

New Year’s “Ir”resolution

Every year we make promises about either going to the gym or quitting smoking, we’ve all done it!
But most of us usually end up chilling on our sofas or lighting another cigarette the next day.

Ever wondered why this happens so often?

We naturally tend to put off unpleasant things to a later date rather than do them today.

If asked on January 1st to pick a date to quit smoking, say, you may well choose to start in a week rather than tomorrow. But by January 7th, would you still be committed to quitting the next day?
It seems like you would on 1st, but in the real world, you would mostly choose to delay your start-date again.

It can be said that it was a time-inconsistent decision.

Time inconsistency is when a decision-maker prefers one decision in advance but a different one when the time of implementation arrives.

If you commit to go on a diet, starting tomorrow, there is a time consistency problem. Because if tomorrow you go to a party and they serve a chocolate cake, your incentive to keep your commitment will be weaker than today’s incentive to make that commitment.

Another example would be saving for retirement (or lack thereof)

The benefits of saving for retirement early are clear: compound interest allows retirement savings to grow almost exponentially. However, many people who have the means to do so don’t start saving for retirement (even though they want to) until much later in their lives, when the benefits of compound interest are much smaller.
We choose to benefit our present self by spending the money instead of saving it.

We are basically dealing with different versions of ourselves in the future, and are biased towards our present-selves and thus put greater weight on the choice that will currently benefit us.

Economists found that the standard economic models cannot explain this behavior, as it assumes that you will be determined to do the same thing, be it the present or the future.

This requires empathizing with your future self, which is hard to do as we can never really consider all the changes that we or our surroundings undergo. The goal is not to predict the future but rather consider the effect of time inconsistency in your plans.

Let’s see how this affects the economy of a business.

Interesting case study on Time Inconsistency

Economists believe that Time Inconsistency might be the reason that most of the African farmers did not use fertilizers, despite knowing that it raises yields and profits. Research showed that using half a teaspoon of fertilizer per plant increased seasonal profits by an average of 36% per acre, even if farmers made no other changes to their farming techniques.

When asked why, almost four-fifths of farmers said that they did not have enough money to buy fertilizer for the land they farmed. However, the fertilizer was made available in multiples of kilograms and poor farmers could afford enough to fertilize a part of their land.

The reason for this was the gap between intent and action.

Right after the harvest, farmers had enough money to buy fertilizers. But going to town to buy it imposes a small cost: a half-hour walk, or a bus ticket. So farmers postpone the purchase, believing they will make it later. But they overestimate their ability to put aside enough money to do that, ensuring that their plans to buy fertilizer meet much the same fate as a typical new-year resolution.

How did they fix it?

They started delivering the fertilizer for free through NGOs for no extra charge, started 50% subsidies for a few farmers and made the delivery at the end of the season costlier. This scheme, early in the season pushed up the usage of fertilizer by 11 percentage over a control group. It seemed as if many farmers were well aware of their tendency to procrastinate and were looking for a way to force themselves to buy the fertilizer.


The idea of understanding the concept of time inconsistency is not so that we can stop it, we can’t. We’re human! But rather to be aware of it and try to increase the incentive and the loss incurred by your Time Inconsistency.

An example:

In the Philippines, when smokers who wanted to quit were offered a “commitment contract”. Those who signed up put money into a zero-interest bank account. If they passed a test certifying that they were nicotine-free six months later, they got their money back. If not, it went to charity. This contract increased the likelihood of quitting by over 30% over a control group.

Ensuring those new-year resolutions didn’t turn to ash.

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