Time Preference and Endowment Building

In political economic theory, there is a concept called time preference. A person (or an institution, such as a school) can have a high time preference or a low time preference. High time preference means that the invidividual or institution is markedly reactive to current events and circumstances. By contrast, low time preference means that the individual or institution maintains an even keel, always focused on long-term stability and continued existence.

Schools looking to grow their endowment must come to terms with time preference.

Annual operating budgets reflect an orientation toward high time preference (i.e., new curricular programs, special speakers, environmental initiatives). Endowments, however, are not meant to be high time preference vehicles.

To build an endowment, schools need to have a low time preference. A reactionary approach to finances will not result in endowment growth; in fact, the opposite will result. The school's current needs/wants will override the discipline to increase cash inflows to the endowment, and there will be no sustainable growth. Low time preference guarantees that the school will pursue and maintain regular cash inflows to the endowment, no matter the high time preference issues that may compete for financial attention.

A glance at search announcements for heads of school shows, almost to a school, that heads are being expected to increase endowment as one of their charges. As if growing an endowment were easy! Underlying this desire to increase endowment is a philosophical issue that boards need to grapple with, if they expect to actually experience endowment growth: their time preference.

If schools can't commit to a low time preference vis-a-vis endowment, the next time they search for a new head of school, they will continue to look for a head who can build the endowment. The cycle will not end until the board consciously embraces a low time preference.

Get the time preference right, and get the increased endowment. Get it wrong, and lose current purchasing power to inflation.