Odysseus has traditionally been viewed in the Iliad as Achilles’ antithesis. Unlike Achilles whose anger is self-destructive, Odysseus is renowned for his self-restraint and diplomatic skills.

While passing through the land of sirens, known for their luring fatal songs, he orders his men to stop their ears with beeswax and ties himself to the mast of the ship. 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.

In economics, dynamic inconsistency, or time inconsistency, describes a situation where a decision maker's preferences change over time in such a way that what is preferred at one point in time is inconsistent with what is preferred at another point in time.

A simple analogy to investing and time preference would be trading gains and losses. It has been observed that the investing community is more eager to cut out gains faster than a similar amount of loss. This can be explained from a temporal perspective also. When choosing between $100 or $110 a day later, individuals may want to wait a day for an extra $10. Yet after a month passes, many of these people will reverse their preferences and now choose the immediate $100 rather than wait a day for an additional $10.

The eagerness to consume or instant gratification compared to deferred gratification is what differentiates the investing majority from the Odysseus minority. Investing is a lot about self-restraint. Humans give more importance to today compared to tomorrow, the idea of “now” is more important than to the idea of some distant time in the future.

Temporal discounting refers to the tendency of people to discount rewards as they approach a temporal horizon in the future or the past. To put it another way, it is a tendency to give greater value to rewards as they move towards the “now”. For instance, a nicotine-deprived smoker may highly value a cigarette available any time in the next six hours but assign little or no value to a cigarette available in six months. Hyperbolic discounting refers to this preferential bias towards “today” compared to “tomorrow”.

This bias creates a systematic tendency for humans 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 which were rationally made in advance. This bias towards now predisposes humans towards instant gratification, towards impatience, towards poor self-control, toward impulsiveness and irrationality. Human preference is time inconsistent.

The Stanford marshmallow experiment was a study on deferred gratification conducted in 1972 by psychologist Walter Mischel of Stanford University. A marshmallow was offered to each child. If the child could resist eating the marshmallow, he was promised two instead of one. The scientists analyzed how long each child resisted the temptation of eating the marshmallow, and whether or not doing so had an effect on their future success. The results confirmed.

Though time influences decision making, humans are prone to poor willpower, vices and resulting poor investment habits. This is why masses prefer consumption to save, there are more day traders compared to investors and even fewer contrarians looking at worst performers. This is why foreseeing a personal irrationality, manipulating willpower and tying oneself to a commitment (mast) is a rare feat.

First Published in 2012