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Time-inconsistent behaviour occurs when an individual lacks the willpower to execute a previously formulated plan, often because their preferences change as the moment of action arrives. Economists use this concept to explain why someone might fail to save for a predictable future event, such as an anticipated drop in income. This failure to save is attributed to an internal struggle, rather than an external constraint, and is a common explanation for behaviors driven by present bias.

Time-Inconsistent Behaviour

Analyze the following scenario and explain why the individual's actions demonstrate a specific type of economic behavior. In your explanation, detail the conflict between the individual's preferences at different points in time.

Retirement Savings Decision

Imagine two individuals, Alex and Ben, who both plan to start a strict diet and exercise regimen on Monday. On Monday morning, Alex decides not to start because they receive an unexpected invitation to a week-long food festival with a friend visiting from out of town. Ben, on the other hand, wakes up on Monday and, despite having no new plans or external changes, decides to postpone the diet until the following week, feeling that the immediate sacrifice of his favorite foods is too great. Analyze the decisions of both individuals. Which person's behavior is a clear example of a failure of willpower due to shifting preferences over time, and why? Explain the key difference in the underlying reasons for their failure to follow through with their original plans.

Analyzing Failures to Follow a Plan

An individual's failure to follow a long-term financial plan due to an unforeseen external event, such as a sudden job loss, is a clear example of time-inconsistent behaviour.

An individual receives a large year-end bonus and immediately makes a plan to deposit the entire amount into a high-yield savings account for a down payment on a house in the future. However, over the next few weeks, they spend the bonus on a luxury vacation and expensive electronics instead, telling themselves they will start saving aggressively from their regular salary next month. Which of the following best explains this individual's actions?

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