Theories of inter-temporal choice

Inter-temporal choice theories address the way individuals make decisions when the rewards or costs of an action are temporally separated. Such theories attempt to explain why people may choose to experience pleasure now at the cost of greater pleasure later; or to face pain now in order to experience greater pleasure later. Common theories suggest that individuals weigh the present value of a reward against its perceived future value, make decisions based on a comparison of short-term and long-term gains, or attempt to maximize expected utility across multiple-time frames. Endowment Effect theory, Hyperbolic Discounting theory and the Prospect Theory are some of the most popular frameworks used to explain inter-temporal choice. Endowment Effect theory suggests that consumers will place a greater value on a good once they become its owner. This is due to the idea that people are averse to bearing the costs of giving up something they possess. Hyperbolic Discounting theory posits that rewards are discounted over time, so that the current reward is weighted more heavily than the reward further down the line. Prospect Theory is a psychological theory that holds that individuals tend to be more averse to losses than gains, leading them to make decisions that are reflective of the magnitude of their loss versus gain. Ultimately, which theory is adopted often depends on the situation and the preferences of the decision-maker.