Concept Architecture
Concept
Theoretically, Time Preference is the tendency for individuals or society to value benefits and costs occurring at different points in time differently, generally preferring benefits sooner and costs later. It is based on intertemporal choice theory and welfare economics and provides the behavioural and theoretical foundation for discounting in economic evaluation. In health economics, time preference explains why future health gains and costs are commonly converted into present values when comparing healthcare interventions.
Mathematically, Time Preference is represented through a discount function that assigns lower present values to outcomes occurring further in the future. Under the conventional exponential discounting framework, the discount rate reflects the strength of time preference and determines how rapidly future values decline relative to present values.
In practice, Time Preference is estimated using revealed-preference studies, stated-preference experiments and observed market behaviour. In health economics, it informs the selection of social and private discount rates used in cost-effectiveness analysis, cost-benefit analysis and long-term decision modelling.
Purpose
Used to represent how present and future costs and health outcomes are valued over time and to provide the theoretical basis for discounting in economic evaluation.
Mathematical Formulae
Primary Formula
Exponential discount function:
PV = FV / (1 + r)?
where:
- PV = present value
- FV = future value
- r = discount rate reflecting time preference
- t = number of time periods
Supporting Formulae
Discount factor:
DF? = 1 / (1 + r)?
Present value of multiple future outcomes:
PV = ????? X? / (1 + r)?
where:
- X? = value of the outcome in period t
Related Mathematical Methods
- Discounting
- Present Value
- Net Present Value
- Social Discount Rate
- Private Discount Rate
- Intertemporal Choice Modelling
Example
A preventive healthcare programme is expected to generate a health benefit equivalent to �250,000 in ten years' time. Assuming a social discount rate of 3.5% reflecting societal time preference:
PV = 250,000 / (1.035)?? = �177,496
The future benefit is therefore valued at approximately �177,496 in present-value terms.
Excel Implementation
| Function | Example Formula | Health Economics Application |
|---|---|---|
| PV | =PV(3.5%,10,0,-250000) | Calculates the present value of future healthcare costs or benefits |
| NPV | =NPV(3.5%,B2:B15) | Discounts multiple future costs or outcomes |
| POWER | =B2/(1+$C$1)^A2 | Manually applies the discount factor |
| XNPV | =XNPV(3.5%,B2:B15,A2:A15) | Discounts irregularly timed healthcare cash flows |
VBA (Optional)
Automate discounting of future healthcare costs and outcomes using alternative time preference assumptions for sensitivity analyses.
Sources
- Samuelson PA. A note on measurement of utility. Review of Economic Studies. 1937;4(2):155?161.
- Frederick S, Loewenstein G, O'Donoghue T. Time discounting and time preference: a critical review. Journal of Economic Literature. 2002;40(2):351?401.
- Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press.
- Briggs A, Claxton K, Sculpher M. Decision Modelling for Health Economic Evaluation. Oxford University Press.
- NICE. Health Technology Evaluations: The Manual.
Related Concepts (2)
Library
Publications
1
NICE DSU Technical Support Document 12: The Use of Health State Utility Values in Decision Models — Brazier, Papaioannou, Cantrell, et al., TSD 12 ed., 2011 (NICE Decision Support Unit (University of Sheffield))
Guidance on selecting and applying health-state utility values within decision models, including consistency, appropriate sources, adjustment for age/comorbidity, and handling of adverse events.
Frequently Asked Questions (6)
What is time preference?
The general tendency to prefer a benefit sooner rather than later, or a cost later rather than sooner, underlying the case for discounting.
Source: Frederick, Loewenstein & O'Donoghue 2002
What does time preference mean in economic evaluation?
Time preference is the tendency to value a benefit received sooner above the same benefit received later, and to prefer that a cost fall later rather than sooner. In economic evaluation it provides the rationale for discounting, since costs and outcomes arising at different times cannot be added directly if people do not weigh them equally. The preference is treated as a feature of how individuals and society trade present against future, and it is distinguished from the separate effect that money can earn a return over time.
Source: Frederick, Loewenstein & O'Donoghue 2002
Why does time preference justify discounting in economic evaluation?
If a future benefit is valued less than an equivalent present one, then costs and outcomes occurring in different years must be converted to a common basis before they are compared, and discounting performs that conversion. Without it, a programme delivering benefits far in the future would be treated as equivalent to one delivering them now, which does not match how the value is actually weighed. Time preference supplies the reason for applying a positive discount rate rather than the specific figure, which is set separately.
Source: Drummond et al. 2015
How is time preference distinguished from the return on invested resources?
Two separate reasons are given for valuing present resources above future ones. Time preference is the direct tendency to weigh a nearer benefit more heavily, independent of any financial return. The opportunity cost of capital is the return that resources could earn if used elsewhere, which makes a sum today worth more than the same sum later regardless of preference. Public appraisal frameworks differ over which reason should determine the discount rate, and some combine both, so the distinction affects how the rate is derived.
Source: Drummond et al. 2015
Does time preference apply to health as well as to money?
Whether health benefits should be discounted for time preference in the same way as money is contested. The case for discounting money rests partly on its investment return, which health does not share, since a unit of health cannot be reinvested to yield more health. Some argue that individuals nonetheless prefer health sooner, supporting a positive rate, while others hold that the rate for health should differ from that for costs. Appraisal frameworks have taken different positions, and several apply the same rate to both while acknowledging the dispute.
Source: Drummond et al. 2015
How does time preference relate to hyperbolic discounting?
Standard practice assumes a constant rate of time preference, under which the weight given to a delay depends only on its length and not on when it occurs. Observed behaviour often departs from this, with people discounting near-term delays more steeply than distant ones, a pattern described as hyperbolic. This implies preferences that reverse as time passes, which complicates the assumption of a single constant rate. Economic evaluation generally retains constant discounting for tractability while recognising that it simplifies how time preference actually operates.
Source: Frederick, Loewenstein & O'Donoghue 2002
Trust Record
Verified by Dr Darrin Baines
British health economist
Professional identity: darrinbaines.org
Verification date: 14 Aug 2025
Content version: 1.0.0
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