DETERMINING "PRESENT VALUE": DISCOUNTING
A KEY CONCEPT IN LIFE AND MONEY
I NEED TO CLARIFY AND DECLARE LONG TERM VALUE...
If I do not spend the time (and learn abit on how to clarify value) to clarify and make certain what my values are, I don't have much of a prayer that I will make good choices.
If I do not learn how to anticipate consequences (or at least bother to try to guess them), I will be choosing without enough "data" to make a good choice.(!!!!)
WE CREATE VALUE "IN OUR MINDS"
The unique ability of humans is that they can create something in the mind that doesn't exist in the world but it "has value" to us and is "real" to us. At the slightest level, we can say: "well, two cookies fifteen minutes from now will give me more satisfaction/pleasure than one cookie right now - so I'll choose to wait for my greater pleasure."
This involves what is called "discounting" the future figuratively and actually. How good you are at using the proper "discount rate" will determine much of the quality of your life and the level of your happiness.
FINANCIALLY COMPARING LONG TERM VALUE WITH THE VALUE RIGHT NOW
In money terms, we think that we can get a return on our money of some amount. Let's say that is 6% per year. If I receive money a year from now, it is worth to me now that sum that I get in one year, minus my cost of waiting for a year. If I spend a dollar right now, instead of investing it, I will experience an "opportunity cost" of making 6% on the money over the next year - I am giving up, losing, not getting 6 cents that I have the opportunity of getting in one year. This means if I get a $1.06 in one year from now, it is worth the same to me as a dollar right now. The $1.06 is discounted (interest is subtracted), taking away some value ($.06), to a current value of $1.00.
In strict financial terms, we can objectively come up with how much interest (or profit) we could make on our money. Interest or profit is what we make over time "going forward" into the future. Discounting is simply the opposite, going the opposite direction, applying the rate of interest (or profit) backwards - subtracting from the future back to the present to come to what the value for me if I take it right now.
It would be ignorant of me, if there were no other factors, to take a dollar right now if I could have a $1.20 (guaranteed safely) in one year.
That's finance. However, there are, in real life, "other factors".
ECONOMICS IS DIFFERENT FROM FINANCE (WHAT!!???!!!)
However, in economics, we might psychologically value spending the dollar now alot more than getting more money to spend later. If all other factors were equal, then taking a $1 now when I could get a $1.20 a year from now, would be foolish - or just ignorant, because I would be failing to check out what a sound valuation would be!
We humans do not think rationally in economics, despite all the old theories. A psychologist won a Nobel Prize In Economics for proving how we actually behave. To get the general idea, you might want to read The Irrational Investor.
Certainly how much we value a dollar right now will be different if we are starving right now. The value of that dollar right now is priceless. You couldn't give me a million dollars in a year that would equal the value of eating right now to avoid starvation and immediate death. However, a might be willing to "starve" for another week of discomfort in order to receive a million dollars one year later. In fact, you could take the "might" out of the sentence, for I surely would do that, as the benefit is greater than the "in my mind" cost.
HOW DOES THIS APPLY TO LIFE?
In life, we must also value giving up something right now and/or incurring a cost to get something of value in the future. If we choose our "discounting rate" poorly, we will end up making bad decisions that will over time produce a much reduced level of happiness and/or prosperity in terms of lasting benefits.
If we do not realize that the cost of studying for one year will produce a benefit of half of that cost every year in the future for forty years, then we are making a "stoooopid" choice in terms of life value - surely a benefit that is worth 20 times the cost is worth paying the cost for.
[Cost = 20,000 units of "feel good"
Benefit = 10,000 units of "feel good" for each of 40 years
Total benefit = 400,000 units
If I discounted the future units at a high rate, say at 20% per year, then the benefit in the 40th year would be very small, but the benefits of the earlier years would still add up to more than the cost. Using a discounting calculator the benefits in terms of "present value" to me would still be higher: 50,000 units compared to a cost of 20,000 - so that would still be a good deal.
However there is also most often value added through compounding, which is essential to determining future value also. Learn it and your life will be immensely better.]
People who misvalue the discount rate (or overvalue the present) will have lives that are a fraction of the total value of those who have learned how to compute the cost and benefits objectively. Yes, the cost "right now" will still seem to be something we do not want to incur, and we will be "behind" at first, in a sense, but after only a relatively short time, the benefits in total will accumulate each year such that they are greater than the costs.
LEARNING THE WISDOM TO APPLY IT CORRECTLY
That's what is rational in an objective sense. Learning the wisdom to be able to determine how things tradeoff is necessary, however, to achieve high returns in life.
As one fellow put it, talking about his children (about 30 years old at the time): "They think the 'long term' is tomorrow."
Now, 10 years later, they are beginning to see the costs of such thinking.
SOME WOULD OBJECT: AFTER ALL WE'RE JUST HUMAN
Yes, we're imperfect and not super beings or fictional heroes. But, given our humanness and that we will get tired and make errors or simply not know enough yet, it is still profoundly stooopid to not learn the wisdom of how things work and how to make them work for one's greater good.
I use that term, believe it or not, with affection for all humans. I don't mean it derogatorily, because, indeed, there is no fault for not knowing better than one knows at the time - but one would be much better off if one began the process of learning wisdom as early and as rapidly as is practical. (An essential understanding in life is to understand what seems contradictory to what we are taught and to how we have chosen to criticize ourselves: Why There Is No Fault. Read it and see if you "get" it - it'll change your life dramatically for the better. [There is no possible discount rate that would make the benefit of this less than the cost of bothering to learn and understand this and apply it for the rest of your life!!!!!!])
THE SOLUTION
If one gains the wisdom to evaluate the net long term value in terms of the present, one will make better decisions when one is "using his/her head". If one does not engage one's higher brain, then the simplistic primitive brain will make the choice based on its childlike simplistic thinking.
I would suggest that one should not let one's life be run by an impulsive, childish, simplistic lower brain system. A good portion of this site is dealing with the realities involved here and how it can make a huge difference if you employ the higher brain AND use decisions already derived (from past thinking) from the higher brain. See Using The Higher Brain As It Should Be Used - The "Secret" To A Greater Life.
In this case, I'll take you back to the unexplained "hanging" header for this piece: "I NEED TO CLARIFY AND DECLARE LONG TERM VALUE...". This refers to deciding ahead of time and even writing it down in a list of decisions about life, and then strongly declaring it what is decided to be of great value.
An example, although you'll probably need to do more supportive learning about this, you could declare that:
"An hour of learning wisdom will produce great future benefits for me, in terms of knowing how to produce greater benefits more smartly and with less and less effort. It would be totally foolish of me to not spend many hours learning wisdom, for I would be giving up so much of what would be a tremendously better life."
It could be stated better, I'm sure, but you get the idea.
Being clear and being strong about something is one of the great "secrets" to success. (The opposite is being unclear, which always, in philosophical languaging, truly sucks!)
