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Time Discounting: Definition & Example

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  • 0:03 Instant vs. Delayed…
  • 0:58 Time Discounting Example
  • 2:50 Another Time…
  • 3:32 Lesson Summary
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Lesson Transcript
Instructor: Toni Bonton

Toni has taught personal finance and is currently pursuing a doctorate in business administration.

It's been said that a dollar today is worth more than a dollar tomorrow. However, in some cases, waiting can sometimes be more beneficial. This lesson will discuss the concept of time discounting and how it can be applied.

Instant vs. Delayed Gratification

Johnny loves chocolate chip cookies. Smelling the fresh baked aroma in the air, he runs downstairs and asks his mother, Donna, for a cookie. Knowing dinner is almost ready, Donna does not want Johnny to ruin his appetite, so she makes her son an offer. If Johnny can wait until after dinner, Donna will give him two cookies instead of one.

What's Johnny to do? Should he choose instant gratification by eating a cookie now, or should he choose delayed gratification by waiting until after dinner to get two cookies in the future? This decision-making process is called time discounting.

Time discounting, also referred to as time preference or delay discounting, is the process of making a decision about a situation by assigning a value to something and deciding how much time, if any, should pass before a certain level of gratification is reached. Time discounting means asking oneself if something is worth more now or later. In other words, will time discount the value?

Time Discounting Example

Seeing what time discounting looks like may help in understanding what happens during the decision-making process. Here we see a time-discounting graph. This graph has several aspects to it:


Time discounting chart


  • Delay - the amount of time an individual is willing to wait
  • Subjective value - the value an individual has assigned to something
  • Desired effect - what an individual really wants
  • Actual effect - what an individual is willing to accept
  • Discounting curve - the line of gratification for an individual

When a decision has to be made, the first step is assigning value or determining what something is worth. Chocolate chip cookies are highly valuable to Johnny because he is willing to risk ruining his appetite just to have one right now.

Now Johnny will have to decide between what he really wants, the desired effect, and what he is willing to accept, the actual effect. He really wants a cookie now, but if he is willing to wait until after dinner, he can have two cookies.

Looking at the graph, the desired effect and the actual effect will eventually intersect the discounting curve. This intersection, the point of gratification, means what an individual wants and what an individual is willing to accept aligns with the point of gratification expected. Instant gratification occurs when the two intersect without any delay in time. On the other hand, delayed gratification happens when there is a delay in time before the two lines intersect.

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