Discount Rate

 

The Entertainer

I am the entertainer
The idol of my age
I make all kinds of money
When I go on the stage
Ah, you've seen me in the papers
I've been in the magazines
But if I go cold I won't get sold
I'll get put in the back in the discount rack
Like another can of beans

What should be the rate in that discount rack?

If the universe is hyperbolic, perhaps the discount rate, how much the future is worth compared to the present, is a fundamental constant of that universe.  The odds of a choice, which is defined as1where 0 is not making that choice, is 0.5.  That means that at its median, 50% will have made the choice and 50% will not have made the choice.  Let’s call 0.5 the range, s, of the choice.  Then the square root of the variance according to a normal logistics distribution of choice is 0.5*√3/π.  This number is 0.9067, or “A bird in the hand is worth 1.1027 (its inverse) in the bush.”  This means that the discount rate is 1/.9069 -100% or 10.27%.  If the interest rate is less than 10.27%, the universe is telling you that the cost of investing, on average, will have a positive rate of return. If interest rate is greater than 10.27% then the universe is telling you that the cost of investing, on average, will have a negative rate of return.

This might explain why humans as a group get nervous when the interest rate of a loan is much higher than 10%  It is only when the repayment is in future inflated dollars that higher interest rates may be tolerable. This discount rate also assumes that the asset being acquired is fully productive during its life and it is not depreciating. If it is depreciating, then that should be subtracted from the discount rate.  However, if an asset can be sold for 5% of its present value after 20 years and produces full value over  those 20 years, it is only depreciating by 0.25% per year.