Comments on: Future & Present: Where Brains, Math and Ethics Collide

By: Brett F. Whysel

Brett F. Whysel — Wed, 18 Nov 2015 15:41:21 +0000

In reply to Ricardo Mateus. Ricardo, thank you for your comment. Perhaps you could offer an example?

By: Brett F. Whysel

Brett F. Whysel — Wed, 18 Nov 2015 15:29:20 +0000

In reply to Scott Taylor. Excellent point. Thanks, Scott.

By: Brett F. Whysel

Brett F. Whysel — Wed, 18 Nov 2015 15:27:45 +0000

In reply to LK Tan. Thank you for your comment, LK. I agree the questions are different, each with a unique set of uncertainties and risks. However, causality is clear in both cases. We invest for retirement because we know mathematically that this will improve our personal welfare later on. We ought to invest to address climate change because we know scientifically* that this is very likely to improve social welfare later on. *http://climate.nasa.gov/scientific-consensus/

By: Ricardo Mateus

Ricardo Mateus — Wed, 18 Nov 2015 12:32:16 +0000

Another important distinction is between discounting consequences which are durable or can be traded within a market (which are the often hidden underlying assumptions of the discounting concept) versus consequences which are not and therefore must be consumed or experienced in the current time. The latter are many times discounted at a null or even negative discount rate.

By: Scott Taylor

Scott Taylor — Tue, 17 Nov 2015 15:55:00 +0000

Regarding your recent posts on discounting and college, I propose that real option analysis can serve as a fruitful alternative to NPV.

— From Wikipedia

Real options analysis, as a discipline, extends from its application in corporate finance, to decision making under uncertainty in general, adapting the techniques developed for financial options to “real-life” decisions.

For example, R&D managers can use real options valuation to help them allocate their R&D budget among diverse projects; a non-business example might be the decision to join the work force, or rather, to forgo several years of income to attend graduate school.

It, thus, forces decision makers to be explicit about the assumptions underlying their projections, and for this reason ROV is increasingly employed as a tool in business strategy formulation.

—

I took a class on real options analysis in undergrad and used this framework help inform my decision to go to grad school, specifically to undertake a 1-year MSc in the UK, opposed to a 2-year MBA in the US.

While you might already be familiar with this method, I figured I would mention it since it is relatively obscure.

For your reference, Investment and Uncertainty by Dixit and Pindyck is the pioneering text on the topic.

Best,

Scott

By: LK Tan

LK Tan — Tue, 17 Nov 2015 14:27:52 +0000

Interesting examples. I don’t know how the math is impacted, but it feels to me that talking about saving for retirement is a different animal from climate change. The former is almost certainly an individual or familial necessity for most people. The latter is could potentially effect everyone, some for the better and some for the worse; it’s not clear whether the proposed actions (reducing carbon emissions) will have the desired outcome; and even if some nations take action, other nations could choose not to do the same. Not to mention that the science isn’t as unanimous as proponents of global warming would like everyone to believe. Anyway, if you introduce uncertainty into the equation, it feels to me that the decision making and the willingness to make trade-offs must be impacted. Perhaps the decisions around a hypothetical comet that definitely will hit the Earth in 100 years would make for an interesting comparison with climate change.