There’s an old question that’s often used to illustrate our lack of financial maturity:
Would you rather have $100 today or $200 a year from now?
And the lesson that follows is the surprising fact that more than a few people tend to choose the cash now rather than doubling their money in a year.
If you take 7% as the long-term average annual increase in the stock market, it would make sense that we should accept an offer of anything more than $107 one year from now rather than taking the immediate cash.
But it’s not that simple.
If someone walked up to me on the side of the road and offered $100 out of the blue, I would be thrilled.
And if they offered $200, I would be even more excited.
But not twice as excited, or even close to that.
It doesn’t make sense logically, but my brain, and I’d venture to guess many others’ as well, doesn’t always think logically.
If I’m being honest, the excitement I would get from winning $100 right now is almost the same as what I would get if I won $200. I’m not in a situation in which I need that extra money to pay the bills, so the marginal happiness I get from free money is more about the idea of having free money than it is about the absolute value.
If I were to take that money and go to dinner with my wife, I don’t even know if there’d be a noticeable difference in the amount that I’d enjoy a $200 meal compared to one for $100. It’s more about the experience and the event of going out than it is about the amount we’d spend.
And if I had to sit and wait for a year before I could have that money, I’d probably diminish the excitement even further as I rationalized all of the other more logical things that I could do with the money.
It’s likely that the total increase in happiness that I’d experience from waiting a year to get $200 would actually be less than what I would experience if I took the money sooner.
So, if I think logically like an economist, it’s ridiculous to imagine that anyone would ever prefer to have $100 now.
But maybe the world isn’t so logical.
-Brandon