7.1 Time Preference and Interest Rates

Time preference governs the trade-off between “benefits now versus benefits in the future.”

In a world with money and credit, time preference is priced through the interest rate:

  • Savers: give up current consumption and demand interest as compensation;
  • Borrowers: are willing to pay interest in order to use future resources in advance.

In reality:

  • The nominal interest rate is only one part of the r-structure;
  • The true r is jointly determined by time preference, institutions, policy, geopolitics, and uncertainty.

Therefore, from the CBT perspective:

  • Changes in interest rates reflect not only money supply and demand but also reassessments of future institutions and risks;
  • Collective shifts in time preference are an underlying driver of many “turning points of an era.”

7.2 Capitalization: Bringing the Future into the Present

Once r exists, the future FCF sequence can be capitalized into EPV:

EPV = sum_{t=1}^{+∞} [ FCF_t / (1 + r)^t ]

Sharp changes in asset prices ultimately mean one of three things:

  • Expected future FCF has changed;
  • The r-structure has changed;
  • Or both have changed at the same time.

Therefore:

  • If FCF expectations are unchanged but r rises—for example because institutional risk increases or r_u rises—asset prices fall;
  • If r is unchanged but expected FCF falls, asset prices also fall;
  • When FCF is directed toward FCF→P and improves future capabilities, long-run EPV rises;
  • If FCF is directed toward FCF→R / FCF→S, EPV may instead deteriorate after a period of short-term prosperity.

7.3 Opportunity Cost: The Road Not Taken Is Also Priced

Every actor faces multiple potential Buses: career paths, investment projects, migration choices, institutional choices.

Opportunity cost is, in essence:

Under a given r-structure, opportunity cost is the difference in EPV between the path chosen and the paths that could have been chosen but were not.

Therefore:

  • In an environment where r, r_u, and r_s are high, short-term arbitrage can appear more “rational”:
  • The future is distrusted, so long-term projects are worth very little after discounting;
  • The opportunity-cost calculation yields: “If I do not take it now, I am simply leaving money on the table.”
  • In an environment with low r, credible institutions, and limited tail risk, long-horizon Positive Buses are easier to build:
  • The future is more predictable, and long-term investment has positive EPV;
  • The opportunity-cost calculation yields: “The short term is actually costing me long-term opportunities.”

CBT does not make a moral judgment in favor of “looking only to the present” or “looking only to the long term.” Instead, it:

Uses the structures of EPV and r to explain what kinds of behavior appear rational “from the actor’s point of view” under different environments, and then asks how institutions and incentives can change that rationality.