Over 400,000 people visited Farnam Street last month to learn how to make better decisions, create new ideas, and avoid stupid errors. With more than 100,000 subscribers to our popular weekly digest, we've become an online intellectual hub. To learn more about we what do, start here.

The Price of Impatience

This short blip appeared on the Freakonomics blog and left me dumbfounded:

The price offered to coffee growers who turn in their “cherries” — ripe coffee beans — at Greenwell Farms in Kona, Hawaii, is $.90 per pound if they are paid weekly and $1.05 if paid monthly.

The weekly price is lower because it takes the company’s accountants more time to work out and record pay if they do it weekly rather than once a month. But what does this price differential imply about the grower’s discount rate? If he takes the weekly rate, on average he is getting $.90 one-half month earlier than he would get $1.05. 

That implies an annual discount rate of nearly 4,000 percent — (1.05/.90)^24 – 1 –- a truly remarkable rate of impatience. Despite this, the tour guide tells me that a lot of growers do take the lower rate of pay.

The time value of money is on our mental model list.

Date:
Filed Under: