Time Preference

The term time preference has recently come into vogue when talking about Bitcoin. I attribute the term to Saifdean Ammous who wrote The Bitcoin Standard and more recently The Fiat Standard. You'll see it referred to as a high time preference or low time preference and the very simple explanation is preferring instant gratification (high time preference) versus being able to play the long game (low time preference). 

When I talk about doing things for your future self, you are playing the long game, you are exhibiting a low time preference. Spending a lot of money when you're younger because you can is an example of high time preference. Only living for today will likely end badly because you have no room for error, no optionality. 

A great application of low time preference in investing comes from a Peter Lynch quote (two in two days!), he said I don't know what direction the next 20% is, but I know what direction the next 100% is. Despite Lynch being a legendary stock picker, that is a nudge to just let the market do its thing for you (the literal definition of ergodic) over the long term.

You can take that as an argument for indexing but that is not the argument I am making. A simple portfolio doesn't have to only consist of passive products. Ever since I started managing portfolios, I've actively managed a mix of individual stocks, indexed sector funds and a couple of narrow strategic funds and I tweak the mix occasionally as needed. These products can absolutely capture the broad market's ergodicity over the long term. 

The other day, someone on Twitter mentioned having maybe placed 1000 trades one day...1000 in one day? He may have been exaggerating but that kind of trading is high time preference and even if he is very successful trading like that, it's a much harder existence, it's the opposite of ergodicity.

This of course applies to many (all?) aspects of life. If you've never lifted weights before and you start today, you actually can benefit immediately but it will take quite a while to see changes in body composition. If you're just an average person looking to be fit, to be able to play with your grandkids and not have a ground level fall ruin your life then even starting to lift at 50, is a low time preference activity targeting your future self at 60 or 70 and older, you typically don't start lifting weights at 50 to drastically improve your life at 51. If you started lifting weights at 30 though, you now reap many benefits from that decision at 40 years old, 50 and older. 

I apply this to the fire department as well. For years we have wanted to send apparatus off district to work on large wildland fires but doing it the "wrong way" just to get out would have been a high time preference that very likely would have end badly. For the 2021 fire season, several things fell into place, our truck was out for much of the summer, generated a lot of revenue and we built a good reputation along the way. This creates a path to vastly upgrading our fleet over the next couple of years and creating more opportunities for guys who can go out. In terms of low time preference, I am ten years in as chief and although this could change, I don't think I will stay past 15 years total as chief. If we can upgrade the fleet the way I would like in the next couple of years thanks to our new off district program, that could take care of all of our fleet needs for the next 20 years. 

I've been living my life this way for decades, long before I'd ever heard of time preference, long before Bitcoin was a thing. Somewhere along the line I learned how to envision my future self which made being able to play the long game in all aspects of life easier to do. I'm convinced this makes life easier which I equate with being better.