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Post 0

Thursday, August 1 - 9:10pmSanction this postReply
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I'm planning to write an article on a new idea I call "evolutionary economics" -- which uses something called "prospect theory" to argue for capitalism. One feature of it is called "hyperbolic discounting" and it means that we are more finicky about short-range investments than we are about long-range ones. This quiz is part of my research for the article, and is adapted from the Intertemporal Choice section (p 270-) of my Complete Idiot's Guide to Game Theory book:

1) How much would you need to receive a month from now in order to match the immediate payment of $15?
2) How much would you need to receive a year from now in order to match the immediate payment of $15?
3) How much would you need to receive 10 years from now in order to match the immediate payment of $15?

Please take this quiz if you are game. If you take it (and post your answers), then that would help me complete my project.

Ed

p.s., Spoiler: In animal labs, pigeons exercise some of the highest natural discounting -- "super-hyper-mega-bolic discounting!" If you "ask" a pigeon how much he would need to receive in just a few seconds from now -- in order to match the immediate payment of 15 dried peas -- he will "tell" you that he is going to need 30 dried peas! Now THAT is finicky! Pigeons must live on a very short time-horizon. It'd be pretty hard to barter with them, because the more you delay payment, the higher the price gets.

Lab tech:
Hey Pigeon, would you complete this task for 15 dried peas?

Pigeon:
Yeah, sure, it sounds pretty reasonable.

Lab tech:
Okay, great. Just give me a few seconds to open up the zip-loc bag and count out your peas.

Pigeon:
Oooooo, that's gonna' cost ya'.

Lab tech:
What do you mean? I'm going to have all the peas for you in just a few seconds.

Pigeon:
But our bargain was that I get the peas NOW.

Lab tech:
I can't believe that you are such a shake-me-down huckster.

Pigeon:
Time is money, Baby. You gonna' fish, or cut bait? Now, how about them peas?

Lab tech:
Okay, now, how much do I owe you?

Pigeon:
You know, the time it took to ask that question just cost you another 9 peas.

Lab tech:
Aaaaaaaaaaaaagh!

:-)

(Edited by Ed Thompson on 8/01, 9:28pm)




Post 1

Saturday, August 3 - 10:54amSanction this postReply
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You guys, it's more of a survey than a quiz. There aren't "wrong" answers, per se. Let me approach this differently. These 3 questions were first asked by Richard Thaler, an economist now in cahoots with Cass Sunstein (they wrote a book together, called something like "Nudge"). Anyway, here are the "average" answers:
1) How much would you need to receive a month from now in order to match the immediate payment of $15?
Median answer = $20; which works out to an interest rate (compounded daily) of 354% annual return-on-investment
2) How much would you need to receive a year from now in order to match the immediate payment of $15?
Median answer = $50; which works out to an interest rate (compounded daily) of 121% annual return-on-investment
3) How much would you need to receive 10 years from now in order to match the immediate payment of $15?
Median answer = $100; which works out to an interest rate (compounded daily) of 19% annual return-on-investment

So let me rephrase the survey. Do you agree with the median answers or would you prefer more or less than the median? Try out these questions instead (you may choose to only answer 1 set if you like):

Set 1
1a) Which would you prefer -- $15 now, or $17.50 in one month's time?
1b) Which would you prefer -- $15 now, or $40 in one month's time?

2a) Which would you prefer -- $15 now, or $25 in one year?
2b) Which would you prefer -- $15 now, or $100 in one year?

3a) Which would you prefer -- $15 now, or $50 in a decade?
3b) Which would you prefer -- $15 now, or $200 in a decade?
Set 2
1a) Which would you prefer -- $15,000 now, or $17,500 in one month's time?
1b) Which would you prefer -- $15,000 now, or $40,000 in one month's time?

2a) Which would you prefer -- $15,000 now, or $25,000 in one year?
2b) Which would you prefer -- $15,000 now, or $100,000 in one year?

3a) Which would you prefer -- $15,000 now, or $50,000 in a decade?
3b) Which would you prefer -- $15,000 now, or $200,000 in a decade?
Ed

(Edited by Ed Thompson on 8/03, 11:08am)




Post 2

Saturday, August 3 - 12:34pmSanction this postReply
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Ed,

I believe that the question can't be answered in a sensible fashion because it is without a needed context.

Money now versus money later cries out for two factors that aren't present in the question as asked:
  • 1) What is my demand or value of money now versus money later? This context varies from person to person, and for a given person, it varies from time to time. How much do I need money right now? What use could I put it too right now? How will that change a month from now?
  • 2) Risk. What is the risk that I'll receive that deferred payment? A written promise from, say, Wells Fargo to pay me next month is much less risky than, say, my flaky next door neighbor saying, "Hey, you know that 15 bucks I owe you, if you'll give me another month, I'll pay you $20 instead."
----------------

The average answers reported by Thaler probably came from university students finding themselves having to answer his questions as part of a class assignment, or as part of a paid research project. And that brings into question what context they brought to the survey. When you give an answer to a question that the circumstances dictate that you answer, it isn't the same as your actual inclinations in a real world circumstance. In that real world circumstance your relationship to money and the risks would speak much more loudly and there wouldn't be the artificial circumstance of having to put some answer down on a piece of paper that didn't actually relate to your money.

If this was done as an experiment where the subjects (again, probably students) had to actually do a deal for real money where they chose between present value and future promise, they would bring the average student's context of a very high demand for money in the present that goes with student poverty.

If it was just a question on a paper, a survey, then they would likely choose a round number, like $20 instead of, say, $19.34. An example of an artificial artifact being introduced. And the amount of money relative to ones disposable income also makes a difference. Those who are wealthy are going to look upon the risk associated with $15 dollars very differently than a person to whom that isn't an insignificant amount.
-----------

The amount of bad research that makes its way to publication is astonishing.





Post 3

Saturday, August 3 - 5:30pmSanction this postReply
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Steve,

Good point about how, when a standard of precision is applied, the questions -- as asked -- are inherently unanswerable. However, there is still an average value per respondent. Let's keep refining to these new questions (note the wider limits, in order to accommodate more for the variability introduced by the different life-scenarios you mentioned):

Set 1
1a) On average, which would you prefer -- $15 now, or $16 in one month's time?
1b) On average, which would you prefer -- $15 now, or $160 in one month's time?

2a) On average, which would you prefer -- $15 now, or $20 in one year?
2b) On average, which would you prefer -- $15 now, or $200 in one year?

3a) On average, which would you prefer -- $15 now, or $40 in a decade?
3b) On average, which would you prefer -- $15 now, or $400 in a decade?
Set 2
1a) On average, which would you prefer -- $15,000 now, or $16,000 in one month's time?
1b) On average, which would you prefer -- $15,000 now, or $160,000 in one month's time?

2a) On average, which would you prefer -- $15,000 now, or $20,000 in one year?
2b) On average, which would you prefer -- $15,000 now, or $2,000,000 in one year?

3a) On average, which would you prefer -- $15,000 now, or $40,000 in a decade?
3b) On average, which would you prefer -- $15,000 now, or $4,000,000 in a decade?




Post 4

Sunday, August 4 - 1:23pmSanction this postReply
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Ed, so, nobody's playing??

My answer to your original questions are:

$15 in a month
$17 in a year
$1000 in 10 years.

My assumptions are that there is no risk of not getting paid, and that I don't really need the money. Factors playing into my answers are expected inflation and expected return I could make on the money, and also the risk that I might not be around in 10 years to enjoy it, so for a longer term like that, my "rate" goes up.



Post 5

Sunday, August 4 - 1:27pmSanction this postReply
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Here, for example, are my answers:

Set 1
1a) On average, which would you prefer -- $15 now, or $16 in one month's time?
$15 now

1b) On average, which would you prefer -- $15 now, or $160 in one month's time?
$160 in a month

2a) On average, which would you prefer -- $15 now, or $20 in one year?
$15 now

2b) On average, which would you prefer -- $15 now, or $200 in one year?
$200 in a year

3a) On average, which would you prefer -- $15 now, or $40 in a decade?
$15 now

3b) On average, which would you prefer -- $15 now, or $400 in a decade?
$400 in a decade

Set 2
1a) On average, which would you prefer -- $15,000 now, or $16,000 in one month's time?
$15,000 now

1b) On average, which would you prefer -- $15,000 now, or $160,000 in one month's time?
$160,000 in a month

2a) On average, which would you prefer -- $15,000 now, or $20,000 in one year?
$15,000 now

2b) On average, which would you prefer -- $15,000 now, or $2,000,000 in one year?
$2,000,000 in a year

3a) On average, which would you prefer -- $15,000 now, or $40,000 in a decade?
$15,000 now

3b) On average, which would you prefer -- $15,000 now, or $4,000,000 in a decade?
$4,000,000 in a decade





Post 6

Sunday, August 4 - 1:41pmSanction this postReply
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Laure, we cross-posted, but -- to reiterate -- your answers (to the original 3 questions) are:

1) How much would you need to receive a month from now in order to match the immediate payment of $15?
$15 in a month

2) How much would you need to receive a year from now in order to match the immediate payment of $15?
$17 in a year

3) How much would you need to receive 10 years from now in order to match the immediate payment of $15?
$1000 in 10 years
Now, those answers are unexpected and I would like to explore the logic behind them if you would agree to indulge me on that.

[assuming you will indulge me]

First of all, you do not seem to demand any interest/discounting whatsoever on money that will only be able to be accessed in one month from now. Secondly, over a year's time, you seem to demand very little in the way of an interest rate/discount rate. Thirdly, what makes the 1-month and 1-year demands so very odd, is that they are contrasted against your 10-year demand -- which is well over 20% interest.

Is that right?

Ed




Post 7

Sunday, August 4 - 9:51pmSanction this postReply
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Here are my answers, assuming that I didn't need the money during the interim -- that I had enough to meet my expenses -- that I could be absolutely assured that I would receive the promised amount at the end of the period (i.e., zero risk), and that there is zero rate of inflation. If there were inflation, then I would have to add the inflation rate into my calculations.

Set 1
1a) On average, which would you prefer -- $15 now, or $16 in one month's time?
$16 in a month, because it's equivalent to investing $15 and getting a return of 6.7% in only one month, which is a very good return on my investment. In other words, I'm giving up the $15 that I could have today in order to get $16 in one month, which is equivalent to investing $15 at a rate of interest that would yield $16 at the end of a month.

1b) On average, which would you prefer -- $15 now, or $160 in one month's time?
Obviously, $160 in a month, because it's equivalent to investing $15 and getting a return of 966.7% in one month, which is an incredible rate of return.

2a) On average, which would you prefer -- $15 now, or $20 in one year?
$20 in a year, because it's equivalent to investing $15 and getting a return of 33% in one year, which is a great return on my investment.

2b) On average, which would you prefer -- $15 now, or $200 in one year?
$200 in a year, which is equivalent to getting a return of 1,233.3% in one year, which is mind boggling!

3a) On average, which would you prefer -- $15 now, or $40 in a decade?
$40 in a decade, because it would amount to a little over 10% interest per year reinvested each year at that rate for 10 years, which is certainly a decent return -- better than in the stock market.

3b) On average, which would you prefer -- $15 now, or $400 in a decade?
$400 in a decade, because it would amount to $38.9% interest per year reinvested each year at that rate for 10 years.

(Edited by William Dwyer on 8/05, 9:15am)




Post 8

Sunday, August 4 - 11:57pmSanction this postReply
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1) How much would you need to receive a month from now in order to match the immediate payment of $15?
$15.12, because that would amount to an interest rate of 10% per year, which is what I would consider an acceptable rate of return.

2) How much would you need to receive a year from now in order to match the immediate payment of $15?
$16.50, because again I would want at least 10% return per year.

3) How much would you need to receive 10 years from now in order to match the immediate payment of $15?
$38.91, because that's what a 10% return per year would give me.



Post 9

Monday, August 5 - 2:31pmSanction this postReply
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So, my answers are pretty similar to Bill's, except for the 10-year answer. My 10-year figure is much different because in my mind there is much more uncertainty about what interest rates and inflation will be 10 years from now, as opposed to one year from now.




Post 10

Monday, August 5 - 9:51pmSanction this postReply
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Hi Laure,

Right, your first two estimates are very close to mine. My third answer, of course, was quite different. As I indicated in my previous post, I was assuming no risk or inflation. However, if I had assumed these, I would certainly have wanted a higher interest rate.

For example, if I had assumed an inflation rate of, say 4%, I would have to add that to the 10% interest rate that I required, bumping it up to 14%. For one month I wouldn't add anything more for risk, but for one year I would add 1% and for 10 years, 3%. So I would want 14% per year for one month, 15% per year for one year and 17% per year for 10 years.

So, for one month, I would want: $15.16
[15 (1.14) ^1/12 = $15.16].

For one year, I would want $17.25
[15*(1.15) = $17.25].

And for 10 years, I would want $72.10
[15*(1.17)^10 = $72.10].

Given an inflation and risk-adjusted rate, my numbers are now even closer to yours than they were before, especially for the one-year period. There is still a big difference in our respective interest rates for the 10-year period. But Ed asked you,
First of all, you do not seem to demand any interest/discounting whatsoever on money that will only be able to be accessed in one month from now.
Yes, good question. Why didn't you demand at least a little interest on the $15 loan for one month?
Secondly, over a year's time, you seem to demand very little in the way of an interest rate/discount rate.
Here I don't agree. I think your interest rate for one year was normal and appropriate.
Thirdly, what makes the 1-month and 1-year demands so very odd, is that they are contrasted against your 10-year demand -- which is well over 20% interest.
Yes, in demanding $1,000, you're asking for an interest rate of 52.2%. Your interest rate for one-year was understandable, but over 10 years, you would have to be assuming either a very large increase in the rate of inflation or a very risky economic environment. Do you know something that we don't know? ;-)

(Edited by William Dwyer on 8/05, 10:54pm)




Post 11

Tuesday, August 6 - 8:25amSanction this postReply
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Hi Bill,

I didn't ask any interest on $15 for a month because, hey, it's only $15. It really makes no difference to me if I get it now or in a month. (And it makes very little difference to you, if you are only demanding 16 cents interest.) If it was a larger amount of money, I'd probably demand some interest even for a month.

You ask if I know something you don't know, in demanding $1000 for 10 years. I could turn that around and ask if you know something I don't know! I really don't know what to expect in terms of inflation over the next ten years, so my uncertainty gets priced in. Think about the real world. If you were asked to do seller-carryback financing on a house you're selling, what interest rate would you demand over 10 years (or worse, 30)? I wouldn't even do it, because of the uncertainty. But over 10 years, I guess I could go for 52.2% - if there were any takers!

Also, it's interesting that you actually calculated your responses, and I just pulled mine out of the air. But still, we are close in the short-term.
(Edited by Laure Chipman on 8/06, 8:26am)




Post 12

Wednesday, August 7 - 8:43amSanction this postReply
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Hi Laure,

The reason I actually calculated mine is that I didn't know any other way to do it. But initially I wasn't accounting for inflation or risk, so I didn't see a reason to distinguish between a longer time period and a shorter one. But in the real world, you have to if you're making a loan. In the case of Ed's example, though, it was an artificially constructed offer, in which the conditions would seem to have been guaranteed. So I saw no reason to worry about not getting the money after the specified time period.






Post 13

Wednesday, August 7 - 8:40pmSanction this postReply
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The fed has been inflating the money supply by 33% per year since 2008 (5 years). CPI has been reported much lower, like 2 to 3 percent. Food prices etc (actual prices) have increased by like 8 to 10% per year.

Banks are defaulting on gold demand deposits. The US told Germany to wait 7 years to withdraw some of thier gold. I don't know about you, but if I went to the bank, and asked for my deposit, and they said to wait 7 years... I'd think they've spent my money and won't ever have it in the future.

So I think theres a huge risk for dollars market purchasing power dropping by large fractions in the future.

I think gold and silver were manipulated down in price to 1300 and 20, and for example gold will rebound to 2000 in a years time.

I think Bitcoin is awesome, and its going to really be turning some heads as its value climbs exponentially. Its rate of return so far this year is already awesome, like from $10 to $105.

I think in 10 years the dollar wont exist anymore. This is due to political demographics in the US (democracy ran by idiots), will spend tax payer's and printed money to worthlessness. This combined with new competing digital currencies and the potential return back to gold and silver backed international banking.

In my mind, I simply wouldn't loan out dollars, expecting payment back in dollars. I have enough dollars to have a safe buffer, and I don't want anymore, I'd rather have other stuff, and go into contracts to get other stuff in the future.

Is the US military still all that dominating? Has the US population shown any sign that it will try to put a lid on government spending and money printing? Paper dollars are at least worth more than those deposited in a bankrupt bank held at a tiny fraction reserve... There is some difficulty in making paper, ink, printing, cutting, and shipping.

So:
1 Month: 1.04^(1/12)* 0.75 toz of silver
1 Year: 1.04 * 0.75 toz of silver
10 Year: (1.04^10) * 0.75 toz of silver

I'd have some concern that loaning out silver wouldn't be repaid... lots of defaults going on today, not much for enforcement of contract. So sorry, going to actually not shake on those rates.

Bitcoins: I think they are too new in the market to get an idea of what thier future value will be. I'd just outright by and own what I can afford to lose in hopes of winning big.

I don't really think loaning out at any fixed interest rate in any denomination makes sense in today's market, particularly for loans longer than a year. The Fed is printing tons of money and giving out tons of loans at lower interest rates than the free market would offer. That right there says that I wouldn't be able to offer you an interest rate that you'd accept.

Today loaning is just for the fed who can print money, and big banks that can just default/get bailed out by the fed. If they stop doing that, then we could talk rates.



Post 14

Saturday, August 10 - 8:21amSanction this postReply
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Thanks for the responses, folks. It'll be of help to my project.

Ed




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