Re: Leaflet through the letterbox - 739.9% APR

Tim wrote:

"Ronald Raygun" wrote
Indeed we do expect him to enjoy a profit of just
under £25 relative to the position he was in *when
he lent the money*. But that's old hat. A whole
month's water has gone under the bridge since then.

Ah, but that time passing hasn't changed
the probabilities, has it? Even at the end of
the month he still has the same chance of
payment, and same chance of non-payment...

Agreed, but that's orthogonal to where you choose to put the
reference point with respect to which you do your measurements.

"Ronald Raygun" wrote
His gain has already happened, on paper, before the
probabilistic outcome is decided. His balance sheet says so.

Then his balance sheet is mis-representative of real-life!

On the contrary. The interest has been earned whether it has
been paid or not. If the borrower absconds, he has stolen
£125, not £100, even though the extra £25 probably never even
existed, and he only actually has the £100 in his pocket (or
what's left after spending most of it).

He has stolen £125 because that is what the loan agreement
says he owes the lender on the due date.

"Ronald Raygun" wrote
Hence we *assume* his gain is in the bag...

No, *you* assume that the gain is in
the bag; *I* assume that he still has a
one-in-a-million chance of not being paid.

Which, according to the scenario outlined, is true!

Quite, I too assume there is a one in a million chance
of the bag being empty at the end of the day. But at the
beginning of the day the bag "had" £125 in it.


Suppose I go to a casino with £100 in my pocket and use this
to buy 100 £1 chips. I spend an hour at the roulette table
and end up with 125 chips. In the next hour I lose the lot.
I go home without the £100 I had when I came.

Did I lose £100? Yes.
Did I lose £125? Yes.

It all depends on the point of reference. I won £25 in the
first hour and lost £125 in the second. I lost £100 during the
whole evening.


So it is with the lender. It makes no difference whether the two
outcomes are thought of on the one hand as going up £25 with high
probability and down £100 with low, or on the other hand going
up £25 unconditionally, and then either staying there with high
probability or dropping £125 with low.

.

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