Finance has a way of thinking about these tradeoffs. It’s called the “discount rate”. For example if you want to value an apartment which rents for an amortized $100 per month, infinite fallacy would be to envision taking profits forever—how can you possibly put a finite value on that? Finance guys instead discount future cashflows by a variable yearly rate, determined arbitrarily based on perceived risk and comparable investment options. Then they also stop the calculation at 30 years into the future. The 30-year term afaik is arbitrarily determined.
I am not sure exactly which factors these two measures are meant to control for. I’ve seen them attributed to risk (no company lives forever), to inflation, to opportunity cost vs other investments, to time preference. But in practice they allow the finance industry to put finite, comparable valuations on cashflows that have no clear end date.
Lets imagine two people who make the opposite error. Lets say both of them want middle class lifestyles, marriage 2.5 kids etc. Short-term Sammy lives for today, he spends all his money on consumption and cuts his work hours to have more free time. Long-term Lenny scrounges away every penny, never goes out and has no chances of meeting women. Common advise to Sammy would be that he should think about his future, and common advise to Lenny would be that he should loosen up because he won’t be able to spend his money or start a family when he’s old.
If you want to rigorously check Sammy and Lenny’s work, I think you’d want to calculate with discount rates. Show that they are both using the wrong discount rate. The problem is that this is too much detail for everyday life. Shorthand concepts like “you are failing the marshmallow test” come to the rescue here. Everyone knows about the marshmallow test, but we lack a meme for the other extreme, and that’s what I’m trying to find.
I see your problem is not that there is one way of doing things but rather there is a good way to put your words across when one extreme happens but we do not have the same for the other one. Therefore it is not as easy to correct people when they do use such fallacies. However two very known concepts come into my head when i read this problem. Sunk cost fallacy and the concept of diminishing returns. Aren’t they are the “meme” you are searching for that can be used to correct someone when they do the infinity fallacy? What do they lack?
Another argument of yours suggest that not using shorthands is not practical in everyday life. So we cannot apply actual analysis of problems. It is more efficient to instead use shorthands that are seemingly working most of the time. However i do agree that sometimes it is not practical to apply actual analysis on everyday life but i would say that most of the time it is practical. In the heat of the moment yes it is reasonable to use shorthands. However after one deals with that problem they should start analyzing the situation and modify their strategies accordingly. I do think that this is practical. Therefore i would still say that abiding by any shorthand all of the time is not as practical as it seems. It would most likely be useful in just making the person have less mental load is all.
If that is still not practical, a new definition for basically finding “do what has to be done according to the situation” can be invented and can be used as a shorthand if it can be developed into a system. Wouldn’t that basically solve both the problems ?
I don’t see the connection to sunk cost or diminishing returns. You can commit the infinity fallacy even if the predicted returns or costs are completely correct. Consider the frugal old loner who dies a millionaire, or the slay the spire examples from the initial post. There is a category of error where even if you predict the long-term trend, it doesn’t matter because you won’t care by the time it happens.
I guess this means that ‘discount rates’ are not as good of a match as I thought?
Prior to this discussion i did not know what discount rate was. So i went and learned about it. Correct me if i am wrong. It is something like this:
Let’s say that i want to have 20.000 dollars exactly 1 year from now. I will invest into some fund that has an interest rate of 5%. How much money should i invest today to have 20.000 dollars exactly 1 year later?
I have to put 19,047619 dollars today to have 20.000 dollars exactly 1 year later.
If i understood it correctly your question to people who does the infinity fallacy is “You assume that you can put any number in the place of 𝑛 even infinity itself. That is illogical.”
Yes i agree. I still think that the law of diminishing returns is fitting for this problem isn’t it?
If you solely take the factors as money and numbers yeah sure maybe in some situations there might not be a diminshing return. Let us just assume that there is not diminishing return as far as money and resources goes. Then i would say that you are excluding the human from the equation. Human is the one who goes thru all of these to achieve a certain thing. If it is not use for the human even if everything else works out correctly. It still does not matter just like you said.
If you want to keep it mathematical think it like this:
Human happiness = H
Effort = E
Money = M
1H 1E 1M
10H 5E 20M
5H 40E 15M
I did not went thru a calculation to get these numbers but they are just there to explain a point. As you can see at first our human gets happy to achieve 10 happiness thru 20 money with only spending 5 effort.
But then he puts more effort. He puts 40 effort and he successfully gets 15 Money. However this time gaining more money simply made him less happy because the effort is too much now.
Isn’t this a diminishing return? You would argue that yes there is a diminishing return in the human happiness but because there IS a diminishing return in the system anyway. What happens when the system does not hit the diminishing return point ever?
I would argue that this changes nothing. Let us just assume that our human somehow gains infinite money with very low effort. The system itself never hits diminishing returns. However our human probably wanted to gain that money for something. The moment that money is way more than enough and that even the effort is so low that the system never hits diminishing returns, it will still hit diminishing returns once the effort hits high enough that it disturbs the targeted confort that the money is being used to acquire. We can even go further than that and can simply say that it should be enough to say that is a diminishing return point the moment the human itself finds it “boring” or “not to matter”.
So for that reason as a “meme” to explain that someone is doing infinity fallacy. Diminishing returns does apply to this situation and it is a well known phrase that can be used in a conversation.
Finance has a way of thinking about these tradeoffs. It’s called the “discount rate”. For example if you want to value an apartment which rents for an amortized $100 per month, infinite fallacy would be to envision taking profits forever—how can you possibly put a finite value on that? Finance guys instead discount future cashflows by a variable yearly rate, determined arbitrarily based on perceived risk and comparable investment options. Then they also stop the calculation at 30 years into the future. The 30-year term afaik is arbitrarily determined.
I am not sure exactly which factors these two measures are meant to control for. I’ve seen them attributed to risk (no company lives forever), to inflation, to opportunity cost vs other investments, to time preference. But in practice they allow the finance industry to put finite, comparable valuations on cashflows that have no clear end date.
Lets imagine two people who make the opposite error. Lets say both of them want middle class lifestyles, marriage 2.5 kids etc. Short-term Sammy lives for today, he spends all his money on consumption and cuts his work hours to have more free time. Long-term Lenny scrounges away every penny, never goes out and has no chances of meeting women. Common advise to Sammy would be that he should think about his future, and common advise to Lenny would be that he should loosen up because he won’t be able to spend his money or start a family when he’s old.
If you want to rigorously check Sammy and Lenny’s work, I think you’d want to calculate with discount rates. Show that they are both using the wrong discount rate. The problem is that this is too much detail for everyday life. Shorthand concepts like “you are failing the marshmallow test” come to the rescue here. Everyone knows about the marshmallow test, but we lack a meme for the other extreme, and that’s what I’m trying to find.
I see your problem is not that there is one way of doing things but rather there is a good way to put your words across when one extreme happens but we do not have the same for the other one. Therefore it is not as easy to correct people when they do use such fallacies. However two very known concepts come into my head when i read this problem. Sunk cost fallacy and the concept of diminishing returns. Aren’t they are the “meme” you are searching for that can be used to correct someone when they do the infinity fallacy? What do they lack?
Another argument of yours suggest that not using shorthands is not practical in everyday life. So we cannot apply actual analysis of problems. It is more efficient to instead use shorthands that are seemingly working most of the time. However i do agree that sometimes it is not practical to apply actual analysis on everyday life but i would say that most of the time it is practical. In the heat of the moment yes it is reasonable to use shorthands. However after one deals with that problem they should start analyzing the situation and modify their strategies accordingly. I do think that this is practical. Therefore i would still say that abiding by any shorthand all of the time is not as practical as it seems. It would most likely be useful in just making the person have less mental load is all.
If that is still not practical, a new definition for basically finding “do what has to be done according to the situation” can be invented and can be used as a shorthand if it can be developed into a system. Wouldn’t that basically solve both the problems ?
I don’t see the connection to sunk cost or diminishing returns. You can commit the infinity fallacy even if the predicted returns or costs are completely correct. Consider the frugal old loner who dies a millionaire, or the slay the spire examples from the initial post. There is a category of error where even if you predict the long-term trend, it doesn’t matter because you won’t care by the time it happens.
I guess this means that ‘discount rates’ are not as good of a match as I thought?
Prior to this discussion i did not know what discount rate was. So i went and learned about it. Correct me if i am wrong. It is something like this:
Let’s say that i want to have 20.000 dollars exactly 1 year from now. I will invest into some fund that has an interest rate of 5%. How much money should i invest today to have 20.000 dollars exactly 1 year later?
The formula is this(source:https://openstax.org/books/principles-finance/pages/7-4-applications-of-tvm-in-finance?query=discount%20rate&target=%7B%22index%22%3A0%2C%22type%22%3A%22search%22%7D#para-00003):
PV = FV × 1/1(1+𝑟)^𝑛
PV = 20.000* 1/1(1+5%)^1
PV = 20.0000 * 1/1(1.05)^1
PV = 20.000 * 0,95238095
PV = 19,047619
I have to put 19,047619 dollars today to have 20.000 dollars exactly 1 year later.
If i understood it correctly your question to people who does the infinity fallacy is “You assume that you can put any number in the place of 𝑛 even infinity itself. That is illogical.”
Yes i agree. I still think that the law of diminishing returns is fitting for this problem isn’t it?
If you solely take the factors as money and numbers yeah sure maybe in some situations there might not be a diminshing return. Let us just assume that there is not diminishing return as far as money and resources goes. Then i would say that you are excluding the human from the equation. Human is the one who goes thru all of these to achieve a certain thing. If it is not use for the human even if everything else works out correctly. It still does not matter just like you said.
If you want to keep it mathematical think it like this:
Human happiness = H
Effort = E
Money = M
1H 1E 1M
10H 5E 20M
5H 40E 15M
I did not went thru a calculation to get these numbers but they are just there to explain a point. As you can see at first our human gets happy to achieve 10 happiness thru 20 money with only spending 5 effort.
But then he puts more effort. He puts 40 effort and he successfully gets 15 Money. However this time gaining more money simply made him less happy because the effort is too much now.
Isn’t this a diminishing return? You would argue that yes there is a diminishing return in the human happiness but because there IS a diminishing return in the system anyway. What happens when the system does not hit the diminishing return point ever?
I would argue that this changes nothing. Let us just assume that our human somehow gains infinite money with very low effort. The system itself never hits diminishing returns. However our human probably wanted to gain that money for something. The moment that money is way more than enough and that even the effort is so low that the system never hits diminishing returns, it will still hit diminishing returns once the effort hits high enough that it disturbs the targeted confort that the money is being used to acquire. We can even go further than that and can simply say that it should be enough to say that is a diminishing return point the moment the human itself finds it “boring” or “not to matter”.
So for that reason as a “meme” to explain that someone is doing infinity fallacy. Diminishing returns does apply to this situation and it is a well known phrase that can be used in a conversation.
Is it still not useful for this situation?