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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.

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