Intertemporal budget choices or, how to be always happy

today and tomorrow

Published en El Pais, January 25th 2020.

The eternal question when you receive money: Do you spent it all as fast as possible and enjoy, or do you keep some of the money for later? Also for many people it is easy or even necessary to spent all now and do not keep anything for later. Eventually we need to maximize our happiness and the hard truth is that you will have extra expenses in the future. If we do not have this planned and foreseen it gets us into troubles.

Economists call this problem the intertemporal budget choices. As I have mentioned in previous articles, economics is the art of making the best out of life, or maximizing your wellbeing. This model can be used in complex economic models to see what current decisions and future decisions help maximizing welfare now and in the future taking into account current and future income and expenses. I can imagine you head is dazzling now and to get you with the feet back on the ground and to show economics is not complicated at all I will give an example.

Imagine you win 20.000 Euros in the lottery. At the moment your welfare goes up immediately thinking of all the things you can do with it. Instant happiness. One option would be to instead of the normal car you were planning to buy, buy the extra cool, roofless sports edition. Money gone. You will have fun, but it’s probably only the first summer, then fun ends and it is most of the time parked in the garage. Or you plan your world journey visiting all the places on your wish list. Once back, you are still enjoying journey for a long time with all the memories, pictures and stories. And with the money left you buy a few bottles of wine and some nicer food, and have nice evenings with friends sharing the best moments of your and their journeys. Longer lasting happiness. That said, I might be wrong, it all depends on the person’s preferences. Maybe you are just that person that enjoys working on your car during the bad weather days and it is an ever increasing joy to get it out of the garage during sunny days to tour around.

So next time some smart ass economist tries to overwhelm you with this model, you know it is actually nothing fancy. Just tell that you adjust your budget between now and the future to be always as happy as possible.

About Arnold Hagens 204 Articles
Arnold Hagens is Economist with strong interest in technology, health and coaching

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