Time-Inconsistent Preferences in Adam Smith

Recent research in economics and psychology reveals that people and animals may evaluate choices inconsistently at certain times or in some areas of their lives. This inconsistency is often characterized, for example, by choosing the smaller and earlier of two alternative cash prizes when both are near, but changing to the larger, later prize as they draw more distant. The persistence and robustness of such observations have led some economists and psychologists to think “that the problem may not come from some extraordinary condition that impairs the normal operation of intentionality, but rather from the process by which all people, perhaps all organisms, evaluate future goals” (Ainslie and Haslam 1992, 58). Evidence supports the postulate that the basic temporal discount function of human beings and some animals is such that preference reversals may naturally arise unless some actions are taken to avoid them. Preference reversals have been explained by the tendency for discounting to increase as the time delay diminishes. Indeed, several experiments and