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[Fred93]

I didn't say that. I said that we exclude those observations from the age calculation. After pay-off the loan is (by definition) "completed". If we attributed increasing age to the loan after it was completed, then, holding all else constant, the annualized return for the portfolio would fall as time passed, as no further interest would be paid on it.

I think I figured out what she is trying to say.  "Age" isn't what I think of as "age" at all, but is instead a measure of how many monthly payment events the loan has successfully survived.  It isn't measured from the present time (like the way you measure your age).  

This is the right number to properly normalize the average invested $, assuming that you don't want to consider the time-value of money.

 (Edited to add: Well, I see a 365 in the denominator, so this age thing must be in units of days, but it is really a measure of # payment events passed, because those are the only events.)

The word "simple" in the original definition of what they are trying to do here (ie they said "simple rate of return") is a code-word for ignoring the time-value of money.  Therefore I assume they are intending to ignore the time-value of money.

Assuming that I have guessed correctly, I would like to know how late loans are handled (possibly by counting the months they are late in the age calculation even tho they haven't paid?), and what end date is used for a defaulted loan.

Aside: To my way of thinking, it is actually easier to include the time-value of money in the calculation.  You just do an IRR on the cash flows.  You don't need to compute any "age" or "average principal".  The IRR calculation does it all for you.   This is the very same calculation used to compute the yields on bonds, etc, etc.

http://en.wikipedia.org/wiki/Internal_rate_of_return

[nonattender]

This issue came up about a week ago, here, in a different thread - same issue - but without resolution:

http://www.prospers.org/forum/greetings-t19896.0.html;msg395950#msg395950

I'm not sure I understand what you are saying, and if you get my point.  If I am calculation the ROI I don't want to include cash that I decided to leave sit in the account because I was to lazy to move, or the 0.8% savings rate didn't give me a compelling reason to move the money.  I had some large sums sitting in my account for a 6-8 weeks and I didn't always transfer money out, so I would need to remove that piece to give me a clearer picture of the ROI.  I don't want to skew the results because I decided not to closely manage the cash balance in my account.

I won't pretend to have read most of this thread, but I think the disconnect between yourself and Urbi is that he's talking about "your" ROI, and you're talking about the ROI of Prosper as your investment vehicle.  I'm more interested in the latter, as well, though much of the focus here is often "idiosyncratic" in nature.

You get to decide what you compute.  As for me, I always wanted to consider the money sitting idle in the prosper account in the calculation.  For me, when I was seriously investing in prosper loans, I had a huge amount of money tied up in loans waiting to issue, auctions waiting to finish, as well as money waiting for me to bid, and money waiting for the 4 day transfer timeout.  I felt this was an intrinsic part of the prosper investing system, and not my doing, so I wanted to count it.  If this money had not been tied up in prosper earning no interest, it would have been in a money market fund earning several percent (ah those were the days).

So, same issue is back on the table, today, with the current discussion:

Additionally, I would think that the use of IRR as I've seen it described here at .org would penalize portfolios where people let cash sit idly in their accounts. I don't really understand the rationale there - we're trying to report the returns you can earn by investing your money in a portfolio of loans, not the value of letting it sit on the platform.

Well that's a deep subject.  You can calculate an IRR either including the effects of idle cash, or not including the effects of idle cash.  I'd be happy with you taking either approach.

However, as I said before, there is nothing inherent in the IRR concept that has anything to do with idle cash.  You just draw a line somewhere, and track the cash flows across that line.  I drew the line between me and my prosper account.  You could draw the line between the prosper account and the notes, thus calculating based on investment in and payments from the notes.

I think this is progress.  Prosper is naturally interested in gauging and reporting the performance of the
underlying notes, as they hope to scale a platform in which idle times will be minimized - by virtue of it.

Individual investors here seem primarily interested in "what have you done for me, lately?" - which is to
say, they want to be reported to via a metric which captures their individual investing experience, now.

Fred's phrasing, making it about "where you draw the line", is much better than mine - and, crystallizes,
visually, for me, anyway, exactly the issue here.  I'd - ideally - prefer to see both metrics get reported.

But I, too, could be satisfi(c)ed by either one... though, I do see the time (and computation!) costs, of
having to calculate individual returns, for each investor - applying a standardized metric, over individual
returns, however, I think there may be significant benefit in building something in to do all of this for us.

(Without trying to derail the discussion into meta-land, I am loving that this feels like it is constructive!)

-t

[ladeeda]

I think I figured out what she is trying to say.  "Age" isn't what I think of as "age" at all, but is instead a measure of how many monthly payment events the loan has successfully survived.  It isn't measured from the present time (like the way you measure your age).  

This is the right number to properly normalize the average invested $, assuming that you don't want to consider the time-value of money. (Edited to add: Well, I see a 365 in the denominator, so this age thing must be in units of days, but it is really a measure of # payment events passed, because those are the only events.)

Yes, exactly. When talking about loans and loss rates, I do use the term "age" and "number of cycles since origination" interchangeably. I can see where (especially in an online forum with people who don't know me personally!) that would be confusing. Sorry about that.

Assuming that I have guessed correctly, I would like to know how late loans are handled (possibly by counting the months they are late in the age calculation even tho they haven't paid?), and what end date is used for a defaulted loan.

As I understand it, a loan enters default due to delinquency at 121 Days Past Due. So the final age for such a loan would be the number of days between that date and the origination date.

Delinquent observations (i.e. less than 121 DPD) are included in the calculation - assuming no payments, the net payment calculation for the delinquent months would be zero, while age would continue to increase.

The word "simple" in the original definition of what they are trying to do here (ie they said "simple rate of return") is a code-word for ignoring the time-value of money.  Therefore I assume they are intending to ignore the time-value of money.

...

Aside: To my way of thinking, it is actually easier to include the time-value of money in the calculation.  You just do an IRR on the cash flows.  You don't need to compute any "age" or "average principal".  The IRR calculation does it all for you. This is the very same calculation used to compute the yields on bonds, etc, etc. http://en.wikipedia.org/wiki/Internal_rate_of_return

A couple thoughts here.

One, "age" is a useful stat for comparing return figures. I would rather have a 10% return on an aged portfolio than a 10% return on a green portfolio. So, independent of whether it's used for the calculation of return, I think it's good that we're calculating and providing it, because it can be difficult for lenders to calculate on their own.

Two, your point about where to draw the IRR line is a good one. I personally would be reluctant to include idle time for two reasons: 1) many lenders do leave their cash to sit idle for long periods of time, and I don't think it makes sense to penalize return calculations in those cases; 2) I think that the systemic sources of idle time are issues that we can work on. That is, for the exact same investments, operational improvements could reduce idle time (and thus increase time-weighted returns), and I think it makes more sense to identify the operational issues separately than to lump them in with the return calculation.

But even were we to decide that an "IRR without idle time" calculation were the right way to go, I think that it would be challenging to differentiate systematically and consistently between the two sources of delay. I'm not saying that it's an uncrackable problem, but given that we already have a return calculation that appears at least grudgingly agreeable, I'd bet on resources being devoted to other, lower-hanging fruit - like improved portfolio reporting and whatnot for lenders. (As a lender myself, I'd love that!)

[Ray Kremer]

After pay-off the loan is (by definition) "completed". If we attributed increasing age to the loan after it was completed, then, holding all else constant, the annualized return for the portfolio would fall as time passed, as no further interest would be paid on it.

Technically that's true. If you put some money into, say, a CD, and then after the CD matured you stuff it under your mattress, the return rate you have gotten on that money from the initial investment date will fall as time passes. That's a simple example. The Prosper system is the opposite of simple, because of all the idle funds, the investing spread out across a multitude of loans with different starting and ending dates, different payment rates depending on the behavior of the borrower, and defaulted loans. I'm not even sure there's a valid way to turn all that into a meaningful number, which is why a lot of people figure their returns based on the money transfers into and out of their Prosper account.

One, "age" is a useful stat for comparing return figures. I would rather have a 10% return on an aged portfolio than a 10% return on a green portfolio.

That goes without saying, because it's two completely different things. A 10% return on an aged portfolio is 10% successfully gained on the investment. A 10% green portfolio is an estimation of future gains that may or may not actually occur.

So, independent of whether it's used for the calculation of return, I think it's good that we're calculating and providing it, because it can be difficult for lenders to calculate on their own.

It is good for Prosper to provide something, yes, as long as it's internally consistent, so that the casual user has some metric to go by. At that point it's a nomenclature quibble, most of these three letter acronym terms have very well defined meanings in the financial world that are apparently different from the calculation that Prosper offers. Prosper has their own grading system for loan listings, this is essentially Prosper's own calculation for return rate. (PROI?) It's good for comparing the return rate of one Prosper investor with another, but questionable for comparing the return rate of Prosper to an external type of financial investment.

[TJGbank]

   w!

[ira01]

Nominate for lobby.

+1.  I think this thread is Lobby-worthy.

[JGuide]

I specifically chose to include the effects of idle cash.

Instant transfer is available - I would suggest that idle cash should not be in the equation.

Seems to me that money made in the secondary market and through incentive programs is not reflected at this time either.

If it was a choice between waiting for Prosper (on a reduce staff) to come up with calculations that take all the factors into account or an honest attempt at a fair reflection now - I would choose the fair reflection now.

(of course I still believe the current Prosper staff is trying hard to be honest and transparent) - although I continue to experience very positive returns on Prosper - so some here might say I am jaded.

Cheers,
    JGuide

[Xenon481]

I specifically chose to include the effects of idle cash.

Instant transfer is available - I would suggest that idle cash should not be in the equation.

Seems to me that money made in the secondary market and through incentive programs is not reflected at this time either.

If it was a choice between waiting for Prosper (on a reduce staff) to come up with calculations that take all the factors into account or an honest attempt at a fair reflection now - I would choose the fair reflection now.

(of course I still believe the current Prosper staff is trying hard to be honest and transparent) - although I continue to experience very positive returns on Prosper - so some here might say I am jaded.

Cheers,
    JGuide

Even with instant transfer which wasn't around when the majority of us were still duped into lending, there is still a significant amount of time where your money is sitting idle while it is bid out onto listings which may fail to fund and listings that wait for over a week before they are finally originated.

[JGuide]

Bid higher amounts?

[God-Father]

I don't think that really helps, but good try.

[JGuide]

    The amount some investors are making on the secondary market and in Prosper  promotions doesn’t seem to be considered in the return either?

  If not this could significantly increase some folks stated return.

http://www.prospers.org/forum/secondary_market-t22984.0.html