The Mundane Situations of Chestnut + Hazel # 40

I came across a comparison that I found slightly problematic. time preference, patience, and the discount rate for present value calculations. so in the comparison, an impatient person is described as a person who has a high discount rate. but i really think that your discount rate is determined by the expected rate of return of your investment portfolio, but patience and impatience is more like liquidity needs. the example mentioned that really famous marshmallow experiment where a kid can have 1 marshmallow now, or 2 marshmallows after a certain period of time. let's think about this in terms of discount rates: the kid who wants 1 marshmallow now has a discount rate of more than 100 %, and the kid of waits for 2 marshmallows has a discount rate of less than 100 %, so that's basically 101 % vs. 99 %. That's not really a big difference in the discount rate, and I really think that this all comes down to 1 kid having higher liquidity requirements than the other kid, and not that 1 kid has a higher discount rate than the other kid.

Whenever I think about what to invest my time or money into, i require a rate of return of something like 20%, and that's also the discount rate I use to determine present value, and it's because whatever I do has to be worth it, the person with a 3% discount rate isn't more patient, that person is just willing to settle for lower returns.

the other problem with this marshmallow experiment thing is that, the marshmallows are consumed, with money it's something like, you either invest in one thing, or you invest is something else, but the consumption of that money is something totally different. in fact: i think that someone with a lower discount rate would be more likely to consume their money than a person with a higher discount rate because a higher discount rate, or a higher expected rate of return means that the incentive to delay gratification is higher

but going back to present value and discount rates, having a present value of 100 bucks, and a discount rate of 3 percent or 20 percent just means that 100 bucks is either equivalent to 103 in the future or 120 in the future, but not having an opportunity that yields something in excess of your discount rate doesn't mean you will consume the money, just that you won't pursue an activity or opportunity less than that rate.