What is time consistency?

Time consistency refers to when you make a commitment to take an action in the future. If the incentive to keep the commitment is the same as the incentive to make the commitment, it’s time consistent. But if the incentive to keep it is significantly less than the incentive to make it, it's time inconsistent.

Where have you heard about time consistency?

It's a term used by economists, and can be best explained by everyday situations. For example, you make a commitment to lose weight, starting tomorrow. But tomorrow you go to a birthday party where ice-cream and cake are served. The incentive to keep your commitment will be weaker than today’s incentive to make that commitment.

What you need to know about time consistency.

In business and economics, an inconsistency in time arises when a decision maker pledges one idea in advance but a different one when the time comes to implement it.

Say the Government promises there will be lower inflation tomorrow. But once tomorrow arrives, reducing inflation may have adverse effects, such as raising unemployment, so there is not much incentive to keep the promise.

Another example is a company that commits to drastically reducing the price of a product it sells if a rival enters the market. But the rival enters the market anyway, so it’s now not in the firm’s best interests to substantially drop the price.

Find out more about time consistency.

In order to better understand psychology in finance, it is important to learn the meaning of behavioural economics.