Lesson 4-3: Interest Rate Concepts
Attempt: 6
Delay Discounting
Delay Discounting is the decrease in the value of a reward as time goes on and is a component of the time value of money.
When I was younger we got a cat and we wanted to encourage some good behaviors and discourage bad ones (namely – use the litter box, not get up on the dining room table or kitchen countertops). We knew that if we saw her on the countertop we had to punish her immediately (spray her with water). If we waited an hour to do so she had no idea why she was being sprayed with water.
We knew if we liked the behavior we had to reward her immediately (this also applies to dogs – if they are trying to learn a new trick the trainer will give them a treat as soon as they perform it on command to reinforce that behavior).
Neither the reward nor the punishment would mean as much to them – be as valuable – if there was a delay in administering it.
The same concept can be applied to finances. Receiving a $10,000 today is more valuable than $10,000 three years from now. If we receive $10,000 today we can invest it and in three years have $10,000+interest (at 10% annually this would be roughly $13,000) verses $10,000 in three years. Here is an illustration in a timeline:
