Financial Decisions are also Moral Decisions
Adam Smith and your impartial spectator can help you chose between spending a windfall on designer clothes or investing in the future.
Imagine you receive a $2,000 prize. Immediately, your mind begins to think of a thousand ways to spend it: designer clothes, trips, exotic dishes, or a new video game console. The options seem endless. However, a friend of yours recommends investing that money in a financial instrument where the money will grow slowly but surely over the months. What would you do?
The decision you make will depend on your time preference, a key concept in finance that describes how much we value present well-being over future well-being. A high time preference reflects an inclination toward immediate gratification, prioritizing near-term benefits; while a low time preference implies a greater willingness to postpone consumption, forgoing current pleasures in pursuit of future benefits.
The decision you make will depend on your time preference, a key concept in finance that describes how much we value present well-being over future well-being. A high time preference reflects an inclination toward immediate gratification, prioritizing near-term benefits; while a low time preference implies a greater willingness to postpone consumption, forgoing current pleasures in pursuit of future benefits.
Many people would choose to spend the prize on immediate pleasures, which would reflect a high time preference. This choice might seem reasonable—after all, life is short and should be enjoyed, right? However, the reality is very different. Those who spend without thinking about tomorrow will find it difficult to cope with unexpected events or gather the resources necessary for important goals, such as buying a home, starting a business, or ensuring a dignified retirement. In practice, high time preference decisions often translate into financial fragility and instability.
Now, consider what happens when thousands, or even millions of people, share a high time preference. The result is societies with a low propensity to save, which hinders capital accumulation and, consequently, limits economic development. We know that capital does not arise spontaneously; it requires prior savings, intertemporal discipline, and a future-oriented vision. Without this foundation, the basis for productive investment, innovation, and improved quality of life are weakened. Thus, time preference not only impacts individuals but also shapes the destiny of nations.
Although the phenomenon of time preference has been widely studied in recent decades, Adam Smith anticipated its importance more than two centuries ago in The Theory of Moral Sentiments. For instance, in Part IV, Chapter II, he states:
The pleasure which we are to enjoy ten years hence interests us so little in comparison with that which we may enjoy to-day, the passion which the first excites is naturally so weak in comparison with that violent emotion which the second is apt to give occasion to, that the one could never be any balance to the other, unless it was supported by the sense of propriety, by the consciousness that we merited the esteem and approbation of everybody, by acting in the one way, and that we became the proper objects of their contempt and derision by behaving in the other.
From a Smithian perspective, the present imposes itself upon us with all the weight of the concrete, since its immediacy directly excites our passions, while the future depends on an act of imagination, which is much less intense and can be more difficult to experience with the same vividness. Therefore, the emotional balance tends to tip toward the present.
Are we condemned to live enslaved by immediate pleasures? Smith answers no. In his view, the relentless pursuit of present gratification can only be moderated through morality, and more specifically through the "sense of propriety." This principle holds that an act is appropriate when the actor's sentiments and motives coincide with the judgment that an “impartial spectator” would make about it. Therefore, acting appropriately consists of moderating our passions to a level that this moral figure would deem acceptable, which, logically, requires the deliberate exercise of self-control. In other words, it is not merely suppressing desires, but consciously aligning our emotions and actions with a standard of propriety that balances immediate impulses with reasoned judgment.
While Smith’s impartial spectator is not identical with the self, we might extend the idea metaphorically. In personal financial decisions, imagining our future self as a kind of inner observer can function similarly, encouraging us to act with prudence and long-term care. Framed this way, saving or investing becomes not a painful sacrifice, but an act of responsibility toward the person we will become.
From this perspective, financial protection is more than rational strategy, it is a moral duty. Without this perspective, it's easy to spend $2,000 on clothing, travel, or entertainment, getting carried away by immediate excitement. But with a strong moral commitment to propriety, we would choose to invest it or at least set it aside in an emergency fund.
By combining reflection, discipline, and a sense of moral obligation, our financial decisions cease to be mere economic choices and can become acts of good moral judgment.
More on this and related topics:
Christopher Martin’s Adam Smith on the Rich and the Poor
Adam Smith Comics: Trinkets of Frivolous Utility
Erik W. Matson's Perspectives from Smith on Wealth and Happiness
Kevin Stucker's Plato, Adam Smith, and the Good Life
Elizabeth M. Hull's Adam Smith and Silas Marner: Heaps of Gold
Richard Gunderman’s Adam Smith on Money and the Pursuit of Happiness
Christopher Martin’s Adam Smith on the Rich and the Poor
Adam Smith Comics: Trinkets of Frivolous Utility
Erik W. Matson's Perspectives from Smith on Wealth and Happiness
Kevin Stucker's Plato, Adam Smith, and the Good Life
Elizabeth M. Hull's Adam Smith and Silas Marner: Heaps of Gold
Richard Gunderman’s Adam Smith on Money and the Pursuit of Happiness