> I'm not sure why absolute values are inherently easier to analyze than rates.
Simple: $10K is greater than $8K. Analysis is complete.
Is 10% better than 8%? Not always. It depends on how much you put in and what the duration for those investments are. This is trivially true, yet so many people ignore this aspect.[1] People also get confused between simple and compound rates.
In a lot of real world investment situations, the inputs and timelines aren't the same. In real estate there are plenty of investments that require a minimum investment and have a fixed timeline (cannot withdraw in that time period). Quickly: Is a $50K investment at 8% compound rate over 7 years better than a $40K investment at 10% simple rate over 5 years?
There are also investment strategies that require periods of holding cash. It's not trivial to compare those with, say, an S&P 500 investment using only rates.
The standard taught in the engineering economics classes:
1. Fix your time interval to whatever is relevant for your situation.
2. Compute the cash you will have at the end of that time interval (i.e. absolute amount)
3. Go with the higher one.
[1] Yes - even in the absolute analysis, you should have the same timeline, and technically it's equivalent to a rate comparison in that sense. But I've found that when people do the absolute analysis, they never seem to forget to account for the timelines being the same.
Simple: $10K is greater than $8K. Analysis is complete.
Is 10% better than 8%? Not always. It depends on how much you put in and what the duration for those investments are. This is trivially true, yet so many people ignore this aspect.[1] People also get confused between simple and compound rates.
In a lot of real world investment situations, the inputs and timelines aren't the same. In real estate there are plenty of investments that require a minimum investment and have a fixed timeline (cannot withdraw in that time period). Quickly: Is a $50K investment at 8% compound rate over 7 years better than a $40K investment at 10% simple rate over 5 years?
There are also investment strategies that require periods of holding cash. It's not trivial to compare those with, say, an S&P 500 investment using only rates.
The standard taught in the engineering economics classes:
1. Fix your time interval to whatever is relevant for your situation.
2. Compute the cash you will have at the end of that time interval (i.e. absolute amount)
3. Go with the higher one.
[1] Yes - even in the absolute analysis, you should have the same timeline, and technically it's equivalent to a rate comparison in that sense. But I've found that when people do the absolute analysis, they never seem to forget to account for the timelines being the same.