Economics Dilemma

[Puppycow]

Reminds me of various "free trial offer" deals. My credit card company would offer me some service for something like two or three months for free, and I could quit any time, no obligation. Hey, it's free, why not take it? Well, my time and effort aren't free, and the hassle of dropping the service before it rolled over automatically to paying for it meant that signing up simply wasn't worthwhile.

Remember that old company that would send you something like 11 CDs for 99 cents? And you could cancel any time IIRC. Of course, they were counting on the fact that many people would be too lazy to cancel. A lot of things are like that. Great deal at first, you pay a lot later. Cell phone contracts, credit cards, they all have some kind of teaser deal to get you started.

 

[blutoski]

I'm not following. In which example is the person getting a return of 1% a day?

Sorry I must have conflated that with other similar studies about investment... I thought it was $100 to return $1 in one day or $3 in 365 days... the findings are similar, though.

In the two choices in the survey Aggle-rithm quoted, one gives a 300% return in a day and the other gives a strange choice: a 300% return in a day, but only for one day, a year from now.

In the example I gave, $1 becomes $3 in 365 days, about .3% per day.

Assuming the returns were repeatable, either a person could make the astronomical profit of tripling their money every day--clearly not sustainable without soon owning the universe--or else they could triple it every year.

Not sustainable because it's an artificial situation with no precedent outside of fraud. This is partly my point: results from these types of hypothetical surveys are very difficult to interpret because our unconscious 'reality brakes' kick in and distort the response. Same critique for moral tests involving throwing railway switches to kill one person instead of ten vs throwing a body onto the tracks to do the same thing. The artificial framework may neutralize the practicality of the results.

According to my calculations, if a person invested $1 and got a return of 1% a day, and kept reinvesting the profits at the same rate, they'd have $37.78 at the end of the year.

Oops. I was off by a factor of 10. I started with $100 seed money for both scenarios, so the final value would be $3,778.34 ($3,668.34 gain over a year from $100 = 3668%). Versus $103 after 365 days (3% yield).

 

[Vilhelmo]

I told her about the study that demonstrated that if people were given the choice between $100 today and $101 tomorrow, most people would wait a day.
However, if they were offered the choice between $100 today and $101 NEXT YEAR, they would take the lesser amount.
This, I told her, is an irrational decision because the amount of time elapsed is irrelevant. It's MORE MONEY. MORE MONEY is worth more.

She disagreed, saying that the dollar might be devalued in that year. "Assume the dollar stays stable," I suggested. She said she could put the money in a savings account and earn more interest that $1.00. "Really?" I said. "You get a $100 windfall and you're going to put it in savings? That would be somewhat out of character for you."

So who is being irrational here?

Depends.
If one has debts or investment opportunities with a greater interest rate than 1%/yr then it would be best to take the money now.
If the currency is facing deflation over the next year, take it now.
If one is starving then taking the money now is likely the most prudent course of action.
Absent these conditions, wait.

 

[daenku32]

I'll take the $100 today thanks. Because I'd need $117 next year this time, due to interest on my highest rate loans.

 

[WildCat]

My The conversation turned to the fact that people in general do not have much sense when it comes to money, and often make irrational decisions. I told her about the study that demonstrated that if people were given the choice between $100 today and $101 tomorrow, most people would wait a day. However, if they were offered the choice between $100 today and $101 NEXT YEAR, they would take the lesser amount. This, I told her, is an irrational decision because the amount of time elapsed is irrelevant. It's MORE MONEY. MORE MONEY is worth more.

No, it's not at all irrational. Money today is worth more than money in the future. That's why interest rates exist and why people are willing to pay them.

 

[WildCat]

I'll have to look up that study and see how the question was phrased. It could be there were conditions that ensured that there was no real difference between waiting a day and waiting a year.

Suppose I hire you to do a job for $1,000. You finish it next week, then I tell you I'll happily pay you the $1,000 in exactly 1 year.

Are you indifferent to this?