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How to lower your discount rate
Mark Broski, a loyal MR reader, asks:
If you woke up one morning and said to yourself, "You know what my problem is? My damn discount rate is too high." What would you do, if anything, to lower it?
Maybe Mark should lower his discount rate later, not now, thus solving the problem right away.
Alternatively, you can view lack of patience and lack of concern for his future self as conceptually distinct problems. To cure lack of patience, develop routines for interrupting episodes of irresponsible present-oriented behavior. Ring up each purchase at a separate store register, or write a journal entry before each cookie you eat.
When it comes to lack of concern for your future self, whoop de doo. If you are going to ignore anyone else's interest, your future self is a good place to start. This is only a problem if you attach special status to your future self, in which case maybe you are not ignoring its interests, at least not relative to your other moral omissions in life.
If you need to be more altruistic more generally, precommit to developing personal ties to those you wish to help. As for your future self, start adopting some old people's habits now, to build the tie between the 2007 you and the 2027 you.
Do you all have any other advice for Mark?
Posted by Tyler Cowen on September 28, 2007 at 07:00 AM in Education | Permalink
Comments
The probelm most people have is that they discount the event they wish to avoid(getting fat, failing the exam) at a low rate ,i.e they fear it's consequences if you ask them. The problem is tommorow's procastination is discounted heavily. Any solution will have to essentially attack these hump-in-the middle type of yield curve problem for discount rates for most people.
My suggestion:
1)break whatever objective you have into shorter weekly type goals, but this is much harder than it sounds and if could have done this you wouldn't ahve ended up in this mess.
2)get yourself in good company-people who are trying to accomplish the smae goals as you are. This is again hard to implement advice.
3) Lastly, my favourite. Stop thinking of high disc rate as a problem. High disc. rates are one of reasons why the US is fountainhead of consumerism and entrepreuship. There are some goals for which getting your disc rate low is useful(having grandchildren, avoiding a bruising extra-marital affair) while for others like saving up to buy a car to impress the neighbours it just ins't worth it. Life is too short to ingnore the present for the future.
Posted by: sa at Sep 28, 2007 8:07:54 AM
Hang out with people who have a negative discount rate. Scots, Jews, monks, nuns and Cubs fans.
Posted by: 8 at Sep 28, 2007 9:35:34 AM
Maybe use your impatience and impulsivity to
commit yourself to a state of affairs that
requires a lower discount rate.
Posted by: Mike Kenny at Sep 28, 2007 10:25:16 AM
I am an advocate of raising your discount rate. Too much planning and living for the future can prevent you from enjoying life -- especially when a bus ends it suddenly. Carry no debt, save and bit and do crazy, good stuff as if you only had two years to live!
Posted by: David Zetland at Sep 28, 2007 10:25:55 AM
Knock someone up, seriously. And if that doesn't work, adopt a baby.
Posted by: kurt at Sep 28, 2007 10:34:33 AM
Post an option-bounty of $1m on your head in 10 years time, via escrow. Then work hard to pay it off.
Posted by: Ross Parker at Sep 28, 2007 10:48:08 AM
I have noticed in myself that high fixed costs can create real problems. So, for instance, doing chores around the house. Because of my high discount rate, the immediate costs I must incur (getting off my butt and mentally preparing for the work seems itself like a fixed cost) keep me from making the first step. When I finally do get in chore-mode, and incur that fixed cost, then I can knock it all out, because the additional chores have more reasonable marginal costs. My struggle then is to get over the first chore.
Posted by: jason voorhees at Sep 28, 2007 12:35:51 PM
Do people even understand discount rates?
sa, someone with a high discount rate isn't going to save up to buy a fancy car (for whatever reason) because the value of a fancy car in the future is dominated by a nice vacation today.
David Z, same thing - if you have a high discount rate you borrow like crazy today.
Let me add that we should all be thankful that Politicians (who are, of course, only human) have high discount rates - this very effectively prevents extreme actions like outlawing fossil fuels in response to global warming worries when the actions have large short-term costs in exchange for heavily discounted future benefits.
Posted by: Bob at Sep 28, 2007 1:06:25 PM
Intriguing idea Ross. Sounds like a good plot to a
movie too!
Posted by: Mike Kenny at Sep 28, 2007 1:36:45 PM
I have "Be kind to your future self" printed on a label and stuck just under the bottom edge of my laptop screen.
Posted by: Jacqueline at Sep 28, 2007 2:25:04 PM
A group here used data in Andrew Hacker's NYRB 11 Oct 07 article "They'd much rather be rich." to calculate the rate of return to getting a BA or advanced degree. We did an IRR estimate to get about 7%. Then we imposed a 0%, 3%, and 10% discount rate on opportunity costs, tuition and earnings differentials. As expected with a high discount rate, further study does not pay. It just confirmed earlier MR findings about differences in earnings but also differences in personal discount rates that govern actual behavior. At least one student in the class was awestruck at the results.
Discount rates matter a lot, and rates differ between people. I just decided NOT to eat the cookie on my desk. bill mcgreevey
Posted by: Bill McGreevey at Sep 28, 2007 2:38:19 PM
@Bob,
Perhaps I wasn't clear. My last point specifically discussed what Broski could do with a low discount rate-buying a car is one of many options but which "I" don't is worht it. Broski will have his own judgment.
What I meant in my post was that Broski's problem isn't a strict trade-off between the present and medium-term future. The problem seems to be not that people are high discounters but that the choice set is wrong-what to discount highly and what not. Most problems that we face aren't going to disapper because of a shift in discount rate. If you don't like doing dishes, you won't like doing them either today or tommorow. What people are concerned about are the consequences of the postponment which in the cases of doing dishes aren't usually that high. However, not all activities in life are like that. Failing an important exam, cheating on your wife,etc are cases where the short-term benfits seem to outweigh the long-run costs and that is indeed so many of us fail important exams and cheat on our loved ones. The main, fundamental problem is not one of discount rates per se but of insurance. I probably don't study for future important exams because the benefits are often intangible. "This" is the main problem that Broski is facing.
When activities have sure pay-offs discount rates are much lower. I am ready to bet that the activities that Broski faces a high discount rate problem are the ones in which the payoff structure is assymetric - small chance of big gain but bigger chance of failure. It is activities like these where even thought the expected value is attractive the discount rate problem is actually a proxy for the rational risk-reward trade-off.
In summary, discount problems are equal to expected value divided by discount factor. While the discussion hinges on the denominator, my understanding is that how we got the numerator is pretty immportant as well.
Posted by: sa at Sep 28, 2007 2:43:28 PM
Yeah, if you're gonna live like you only have a year or two to go, live like J.J. Cale sang about in "It's Easy":
"If cash is your problem, you might regret
Use that old plastic, slide two third in debt
It's easy
Easy you see
If tomorrow never comes, everything is free"
However, I like living like I'm going to die any minute and like I'm going to live forever .... simulataneously (From Zorba the Greek by Nikos Kazantzakis):
"Look, one day I had gone to a little village. An old grandfather of ninety was busy planting an almond tree. 'What, grandad!' I exclaimed. 'Planting an almond tree?' And he, bent as he was, turned around and said: 'My son, I carry on as if I should never die.' I replied: 'And I carry on as if I was going to die any minute.' Which of us was right, boss?"
The trick is trying to do both simultaneously...
Posted by: Yogi at Sep 28, 2007 3:37:57 PM
Consider "Most people overestimate what they can do in one year and underestimate what they can do in ten years."
Or take a look at Neuro-Linguistic Programming--it's got a lot about how people imagine things. If the pleasures of the present are vivid to you and the possibilities of the future are faint and vague, this can be tweaked. The Heart of the Mind by Steve and Connirae Andreas is a good book.
Posted by: Nancy Lebovitz at Sep 28, 2007 4:03:51 PM
discount rates are determined by brain activity?
http://mywiki.jp/neuroeconomics/taiki/
Posted by: NLP? at Sep 28, 2007 9:02:37 PM
I don't think this is a valid question. Your discount rate cannot be too high or low. You can not rationally want to change it, after all, who is setting it?
That said...
Assume that you discount the future with the same rate that you project the present, Warren Buffett would have one of the highest discount rates. His trade offs are always "something nice now or something much nicer in a few years". He is famously thrifty because that is what makes sense with such a high discount rate. Invest.
So one way to lower your discount rate is to not allow yourself to earn good returns on your invested assets. Force yourself to put your money into non interest bearing accounts. Not a good idea, but neither is the question.
Posted by: Jeff at Sep 29, 2007 6:00:52 AM
I would advice gifting urself with a dollar everytime who do something good for the future, like if you are a smoker, and you start smoking only 1 pack instead of 2, coz u r worried about ur future health, or consumption in future, gift urself some additional money, or reward urself with something. This works for me.
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Posted by: fasdf at Sep 30, 2007 4:14:45 AM
Maybe Mark should lower his discount rate later, not now, thus solving the problem right away.
That's a pretty awesome joke.
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