Re: Fundamentals

[John Vertegaal <vertegaa@xxxxxxxxx>]

What in heaven's name do fundamental particles in the universe
have to do with the values _we_ have put on existing economic
assets?  Are you serious; playing me for dumb; or perhaps a
bit confused and trying to apply the math of an evolving
physical system on a path from here to there, to a self-
resolving system of accounts?

Our universe doesn't relinquish huge segments of its being
just because we are unable to calculate trajectories.
But the economy is no doubt subject to total collapse when,
because of plain ignorance about how returns materialize, our
economic values get far enough out of whack.  To equate the
two is absurd.

By all means though, keep your faith in the micro foundations
that underlie capital values, you've got plenty of company
and apparently it's written in the stars that you are right.

John V


John M. Legge wrote:

>John V,

>In the sense that every fundamental particle in the universe has a spin,
>charge, position and velocity determinate to the level permitted by
>Heisenberg the point of departure for any real process (and if you accept
>the idea of a material brain, every imaginary one too) is determinate.

>It would require, however, a computer of complexity of the order of N^N^N
>(where N is the number of fundamental particles in the universe, not
>forgetting photons) to make long term predictions of the trajectory of the
>universe or any non-trivial subset of it.  The trajectory of the universe
>and all non-trivial subsets of it is incalculable to any agent limited to
>using a computer no bigger than the universe itself: "the universe is its
>own best predictor".

>Fundamentals, in the sense that you describe them, may exist but limitations
>on our knowledge and our computing ability mean that any predictions that we
>make should be expected to deviate from emerging reality at an exponential
>rate (the Lyapunov exponent).  Since our knowledge of today's fundamentals
>can be no better than approximate, our predictions will be subject to a
>wider margin of error than our current knowledge is, and this error will
>grow with time.

>If you use the term "fundamental" in a less fundamental way, as I do, and
>apply it to the problem of determining what a reasonable person might
>reasonably pay for an income-generating asset, when not influenced by
>speculative or beauty contest motives, the Dixit and Pindyck approach, or
>any other approach based on uncertainty increasing with the time from now to
>the expected event, produces a pragmatically acceptable result.

>Such approaches also suggest a rational liquidity preference and offer
>micro-level support to Keynes as distinct from Marshall and the finance
>textbooks which suggest that investments with an infinitesimally positive
>interest rate are to be preferred to holding cash.

>Note to Steve K if you have got this far: the payback method of project
>valuation is reasonably valid for investments where the opportunity is
>available to all members of the relevant industry and the returns commence
>without delay.  Such investments are typically associated with cost
>reductions.  (Working through the required combination of diffusion and
>uncertain investment models consistently suggests hurdle rates consistent
>with approximately a three year payback.)  D&P style augmented NPV
>calculations are needed when the investment phase itself will take a
>significant amount of time, such as the development and testing of a new
>product.

>JML