14 Chapters
Medium 9781626563018

Chapter 12 Present Value and the Distant Future—Planting Trees and Leaving a Legacy

Neuwirth, Peter Berrett-Koehler Publishers ePub

PRESENT VALUE AND THE DISTANT FUTURE — PLANTING TREES AND LEAVINGA LEGACY

About two years ago, my wife and I bought a small farm north of San Francisco. With eight acres and two (rundown) houses on the property, it was only an hour away from our jobs and therefore an ideal short-term weekend getaway, a long-term retirement home for us, and maybe—if we are lucky—a place where our son and his family might one day come and stay. I can’t honestly say that I did a Present Value analysis when we bought the place. The simple fact was that we saw the property and just fell in love with it. But that being said, now that we own it, we are constantly having to make decisions that have Present Value at their core.

Most of those decisions are of a mundane, day-today type that we talked about in chapter 2 (e.g., whether to rewire one of the houses, put a new septic system in, and/or convert to solar energy), but more than a few are decisions whose future consequences extend beyond our lifetime. For example, the people who owned the property before us had a variety of animals. There were horse stables, chicken coops, and several fenced-in pastures for goats and sheep to graze. This is not our kind of farming, and so over the last several months we have been dismantling the infrastructure designed for livestock and thinking about what to put in its place.

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Chapter 8 Step 4—Weigh the Now and the Later

Neuwirth, Peter Berrett-Koehler Publishers ePub

STEP 4—WEIGH THE NOW AND THE LATER

Throughout this book I have talked about the need to develop your own personal rate of discount and, more generally, how making good decisions requires clarity on how much weight to put on the costs and benefits that arise today versus those that are received or have to be paid in the future. Each of us is different, and each decision has its own unique cost/reward timeline, but in every case we need to do three things before we can assign “values” to things that may or may not happen in the future. We have already talked about one of them, that is, determining the relative likelihood of those future events. The other two are the concern of this chapter.

First, we have to figure out what our time horizon is, that is, how far into the future is it worth thinking about. There are many reasons to limit the endpoint of our consideration of future events. Sometimes, the events are far enough in the future so that by the time they happen, our original decision will be moot. For example, when I considered how many running shoes to buy, I knew that by the time I was eighty-five or ninety, I would almost certainly either not be running or no longer be alive so I didn’t have to think about shoe technology beyond that point. Sometimes, the “expanding funnel of doubt” that makes up the future will be so wide and opaque that it will simply not be possible or worthwhile to imagine—let alone evaluate—the possibilities. Finally, even if it might be relevant and we theoretically could evaluate the probabilities, sometimes we simply don’t care what happens beyond a certain point and therefore should limit the extent of our analysis.

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Chapter 4 The Mechanics of Present Value—What Is a Discount Rate?

Neuwirth, Peter Berrett-Koehler Publishers ePub

THE MECHANICS OF PRESENT VALUE — WHAT IS A DISCOUNT RATE?

Before we move on to a detailed discussion of what each of the five steps in using Present Value entails, I want to be a little bit more rigorous in describing the term “Present Value” and then go through the basics of a Present Value calculation. Critical to understanding that discussion will be the concept of a discount rate, so let’s spend some time talking about discount rates and what Present Value really means.

The next few paragraphs have a tiny bit of math and are more quantitative than we will generally get. While Present Value math is not at all necessary to understanding the rest of the book, there is one “mathematical process” —using a discount rate—that is required before you can actually use Present Value in your life. Fortunately, however, the math required to use a discount rate is very easy and is just the reverse of a concept almost everyone is familiar with—that of compound interest and the way money accumulates into the future.

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Chapter 11 When Money Doesn’t Matter

Neuwirth, Peter Berrett-Koehler Publishers ePub

WHEN MONEY DOESN’T MATTER

One of the challenges that I got from friends and colleagues as I was starting to write this book was that, to many, Present Value seemed like a very limited concept that can only be utilized when the decision being faced is a financial one. The question they posed was, if you can’t translate the value of the thing you are considering to a dollar amount, how will you ever be able to use Present Value mathematics to conclude anything useful? I believe that many of the examples that I’ve discussed in the last few chapters show that nonmonetary values can be looked at through the lens of Present Value, but in most of those examples money was still the most important component of the choice. But what if money is not the main consideration? In fact, what about situations where money doesn’t matter at all? In this chapter we will look at a few of those cases.

“I’d rather be eaten by the Bear than hide in my cave waiting to starve.”

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Chapter 7 Step 3—Evaluate the Possibilities

Neuwirth, Peter Berrett-Koehler Publishers ePub

STEP 3—EVALUATE THE POSSIBILITIES

The evaluation of the relative likelihood of different future scenarios is something we all do almost every day, and many of us have to do it in our jobs. However, most of the time we are not aware that we are doing it, or we do it based on our seemingly incurable hardwired tendency pointed out by many researchers (like Kahneman and Tversky) that makes us seek out patterns and see intentionality in the occurrence of events, most often on the basis of statistically insignificant or highly biased “samples” of past experience.19 What is important about this step in the Present Value process is that you try and free yourself from that inclination and think hard about what is measurable, what is not, and what really will give you a clue as to what might happen next. To see what I mean, let’s go back to my friend Bob and another favorite subject of conversation—baseball.

You see, in addition to his expertise at bridge, Bob is also a serious baseball fan. Growing up rooting for the old Brooklyn Dodgers, he learned to hate the Yankees at an early age (apparently the two go hand in hand). Being a rabid Boston Red Sox fan myself, we bonded immediately over our common hatred for the Yankees and shared many a beer commiserating with each other over the unfairness of their continued dominance of the sport. In the course of those discussions, I came to appreciate what a student of the game Bob was with his eye for the subtle nuances that abound in both strategy and play. This, combined with his encyclopedic memory and intuition for probability and statistics (as well as his Jesuit training in rhetoric), made him truly formidable in the numerous barroom debates in which he and many of his colleagues engaged. In some ways, baseball is a perfect environment to see the operation of probability and statistics in real time and to experience the perils of projection and prediction when probability theory is misapplied and those statistics are abused. From discussions of “hot streaks” and “clutch hitters”—two concepts that Bob and I were both highly skeptical of—to making predictions (and sometimes wagers) on future player or team performance, the significance of data on past performance as a predictor of future events is as relevant in baseball as in any other field where knowing the relative likelihood of future events is important. In this area (as well as many others), Bob was a master at honing in on what was relevant, measurable, and significant in ascertaining “true” ability (hitting, pitching, etc.) and likely future outcomes.

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