Interest Rates, Discount Rates, and the Net Present Value of Things

  • Interest Rates, Discount Rates, and the Net Present Value of Things

    Interest Rates, Discount Rates, and the Net Present Value of Things

    Why do we use exponential discounting to bring future valuation into the present?

    George Ainslie reckons that as individual decision-makers we do not discount the future according to some exponential curve, but instead apply an hyperbolic function.

    What this effectively means is that:

    • Individuals effectively value future events much less than traditional formulas suggest, and
    • The realisation of value (in the mind of the decision-maker), rather than changing steadily through time actually changes dramatically as the event in question comes closer to reality.

    Ainslie is a serious researcher. He provides convincing support for his case. In my book Capital and Uncertainty I examine his findings and demonstrate further support for the proposition. There are important implications for entrepreneurship and large decision-making.

    (Article originally mentioned in the Capital Strategy Newsletter #2002/01)

    Ian Runge Mining Download Newsletter Button

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