Time versus money: a surreal illustration showing the economic trade-off.

Time or Money? Unlocking the Secrets of Your Economic Preferences and Avoiding Costly Miscalculations

Theo Raines in Business & Economy August 2025 • 4 min read.

"New research reveals that understanding your personal economic preferences—especially how you value time versus money—can lead to better financial decisions and more accurate economic modeling."

In economics, it's long been assumed that individuals make rational choices based on clear preferences. However, traditional models often simplify these preferences, potentially leading to inaccurate predictions and suboptimal decisions. One critical area where this simplification occurs is in how we value time versus money, and how our preferences for each influence economic decisions.

Traditional economic models often treat time and risk as separable, meaning that our preference for one doesn't directly influence our preference for the other. But what if this isn't the case? Recent research challenges this assumption, suggesting that our attitudes toward risk and our valuation of time are intertwined in ways that significantly impact our financial choices.

A groundbreaking paper by Lu, Luo, Saito, and Xin delves into the complexities of time-separable preferences, questioning whether simplified models accurately capture individual economic behavior. Their work focuses on how accurately capturing these preferences can lead to dramatically improved decision-making and policy formulation.

What are Time-Separable Preferences and Why Do They Matter?

Time versus money: a surreal illustration showing the economic trade-off.

Time-separable preferences assume that an individual's willingness to delay gratification (saving money) is independent of their attitude toward risk (investing). This assumption simplifies economic models, but it may not reflect reality. Think about it: Are you more willing to invest in a risky venture if you know it will pay off sooner rather than later? Traditional models might miss this nuance.

The authors of the study highlight that relying on time-separable models can lead to misleading conclusions about key economic parameters, such as an individual's risk tolerance. If a model incorrectly assumes that time and risk preferences are separate, it might overestimate risk aversion or miscalculate how people respond to long-term financial incentives.

Misleading Policy Recommendations: If policymakers rely on flawed models, they may design ineffective or even harmful economic policies.
Inaccurate Risk Assessment: Investors using these models might misjudge the true risks and rewards of different investment opportunities.
Suboptimal Personal Finance: Individuals could make poor decisions about saving, spending, and retirement planning.

The researchers emphasize that understanding the interplay between time and risk preferences is crucial for anyone involved in financial decision-making, from individuals managing their savings to economists advising governments.

The Path Forward: Embracing More Realistic Economic Models

The research by Lu, Luo, Saito, and Xin serves as a reminder that economic models are only as good as the assumptions they're built upon. By questioning the traditional notion of time-separable preferences, they pave the way for more realistic and nuanced models that better reflect human economic behavior. As these models evolve, we can expect more informed financial decisions, more effective economic policies, and a deeper understanding of what truly drives our choices.

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Everything You Need To Know

What are time-separable preferences, and why do they matter in economic decision-making?

Time-separable preferences, as traditionally understood in economics, assume that an individual's willingness to delay gratification (saving money) is entirely separate from their attitude toward risk (investing). The core issue, as highlighted by research from Lu, Luo, Saito, and Xin, is that this assumption might not reflect reality. Individuals' preferences for time and risk can be intertwined, influencing financial choices. The implications of relying on time-separable models can be significant, leading to misleading conclusions about risk tolerance, inaccurate risk assessments in investments, and the potential for suboptimal personal finance decisions. Policymakers can make ineffective or even harmful economic policies if based on flawed models.

How can understanding time versus money preferences lead to better financial decisions?

Understanding your personal economic preferences, specifically how you value time versus money, can be crucial for improved financial decision-making. The research by Lu, Luo, Saito, and Xin emphasizes that the traditional economic models may oversimplify human economic behavior by using the concept of time-separable preferences. If these preferences are understood more realistically, individuals can make more informed choices. For example, recognizing that your willingness to invest in a risky venture might increase if the payoff is expected sooner can lead to better investment strategies and smarter choices about saving, spending, and retirement planning. This deeper understanding allows for a more accurate assessment of risk and rewards.

What are the potential consequences of relying on economic models that assume time-separable preferences?

Relying on economic models that assume time-separable preferences can lead to several critical consequences. The research suggests that these models may not accurately capture individual economic behavior, potentially leading to misleading policy recommendations. For instance, policymakers relying on flawed models may design ineffective or even harmful economic policies. Investors using these models might misjudge the true risks and rewards of different investment opportunities. Furthermore, individuals could make poor decisions about saving, spending, and retirement planning. These models might overestimate risk aversion or miscalculate how people respond to long-term financial incentives.

Who are Lu, Luo, Saito, and Xin, and what is the significance of their research?

Lu, Luo, Saito, and Xin are the authors of a groundbreaking paper that delves into the complexities of time-separable preferences. Their research challenges the traditional assumption that our preference for time is entirely independent of our preference for risk. The significance of their work lies in their demonstration that accurately capturing these preferences can lead to dramatically improved decision-making and policy formulation. They emphasize that understanding the interplay between time and risk preferences is crucial for anyone involved in financial decision-making, from individuals managing their savings to economists advising governments. Their work encourages a move toward more realistic economic models that better reflect human economic behavior.

How can a better understanding of economic preferences affect policy and individual financial choices?

A better understanding of economic preferences, particularly how we value time versus money, can significantly impact both policy and individual financial choices. For policymakers, moving away from time-separable models can lead to the design of more effective and beneficial economic policies. This can involve more accurate assessments of how individuals respond to incentives, leading to policies that are more aligned with actual economic behaviors. For individuals, recognizing how their time and risk preferences interact can lead to improved financial decisions. This involves making more informed choices about investments, savings, and overall financial planning. By understanding these preferences, individuals can better manage risk, make more realistic financial goals, and ultimately, improve their financial well-being.