A friend who is an armchair economist (in a good way), noted that America's poor apply a much too high discount factor to future cash flow streams. In other words, they place too much value int today's pleasure and not enough in the avoidance of future pain. It's this short-sightedness that let them end up in this situation.
> It's this short-sightedness that let them end up in this situation.
When you're close to the poverty line you've been taught by experience that saved money will be just eaten up by future crises anyway, so why not enjoy a little treat while you can? If future pain seems unavoidable, why not take some pleasure today?
This attitude seems hard to understand for people who didn't grow up poor. You need a certain amount of money to get over the threshold of not living paycheck-to-paycheck. There are several ways you can get it: grow up while already over this threshold (if you could call your parents and ask them for 10K if you had a real need, you're over it), borrow the money (for example, for college), get lucky, or live far below your means while saving it up.
The time when you can borrow the money is a limited window, usually, around 17-23. If you don't understand that this is important and possible, the window vanishes.
Living far below your means while saving up money is not only very difficult to do, culturally, for Americans, but takes a long time at minimum wage or some small multiple of it, and you have to resist the urge to do things like buying business casual clothes in the hopes of getting a better job, or buying a newer car in the hopes that the maintenance will be lower enough that it pays for itself, etc. Those things can work, but they fall under "get lucky". :)
I sort-of agree with you, but these people were hardly poor a year ago! Their household income easily exceeded $75K! And, it was obvious that they had considerable disposable income.
That's true. It may be that they grew up poor, or it may be that they're just "poor" psychologically. I dunno. I have a lot of these tendencies, but I got lucky (I now feel).
The time when you can borrow the money is a limited window, usually, around 17-23. If you don't understand that this is important and possible, the window vanishes.
You are right that there is a limited window, but it is not so tied to age. My wife was a "nontraditional student" and they were more than happy to give her student loans.
A better threshold is kids and mortgage. If you have real dependents that need money now for things like food/diapers/clothes then it becomes much more challenging, perhaps insurmountable.
A year ago, the man alone was making $53K! Let's presume the woman contributed at least another $25K. That's a well above-average household income in America.
However, while past studies cover a wide range of choice situations, there is a remarkable
consensus in the literature that future outcomes are discounted (or undervalued) relative to
immediate outcomes. Put differently, an identical (positive) outcome will become increasingly
attractive the closer it is located in time to the time of decision-making.
This I don't doubt. I'd rather have a dollar today than a dollar tomorrow. It's that this family applied such a steep discount factor that is problematic.
One also shouldn't think of the discount factor just in terms of dollars spent. We can compare the pleasure today of drinking Pepsi, smoking, etc. with the probable pain later associated with losing one's home, etc. How many units of future pain is that Pepsi worth?
"much too high discount factor to future cash flow"
Easy to say. Except they know too many people who had $400K in their 'future' and now have $150K; or who've worked all their lives and are now destitute for medical bills.
The 'system' has been screwing those folks for 30 years. And then a couple years ago it started working its way up the food chain. And now the middle-class is starting to take their jobs.
