The Two Principles as to Impatience

The rate of time preference depends upon the character of the income stream, but it must now take into account the fact that both the immediate and the future (especially the future) portions of that stream are subject to risk. There are many rates of time preference, or impatience, according to the risks involved. But they all depend on the character of the expected and possible income stream of each individual—its size, shape, composition and especially the degree of uncertainty attaching to various parts of it as well as the degree of uncertainty of life of the recipient.

It is still true, of course, that the individual decides on the option most wanted. But, in a world of uncertainty there are two features not present in a world of certainty. One (which however does not affect the formulation of the principle) is that what is now desired may prove disappointing. That is, though it seems, when chosen, the most desirable course, it may not prove the most desirable in the sense of deserving, in view of later developments, to be desired. The other new feature is that the most desired income stream is no longer necessarily synonymous with that which harmonizes the rate of preference with the rate of interest.

Rates of time preference in any one market tend toward equality by the practice of borrowing and lending, and more generally, that of buying and selling, but this equality is no longer, in all cases, attainable, because of limitations on the freedom to modify the income stream at will, limitations growing out of the existence of the element of risk and consequent limitations on the borrowing power.