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.
via The Price of Impatience – Freakonomics Blog – NYTimes.com.
rePost::The Price of Impatience – Freakonomics Blog – NYTimes.com
Why a lot of people can’t be trusted with markets. This is a relatively easy calculation to make, but ordinary people make this mistake. Maybe there really is a need for some foundation of some kind to teach simple financial/life lessons to help people act more rationally.