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Many of the most important decisions we make involve trade-offs between the present and future.<\/strong> How much of my income should I save today for my retirement? What costs should governments incur today to reduce the risk of catastrophic climate change in the (hopefully) distant future? How should businesses allocate investments that pay off in the short run (advertising) and those with riskier, long-run benefits (R&D)?<\/p>\n The finance profession has used the concept of net present value<\/strong> to answer such questions for more than a century<\/a>. It’s a mathematical formula that allows us to compare and decide between present and future cash flows. The standard (“exponential”) version entails discounting future cash flows on by a fixed percentage each year: A dollar in one year is worth 93 cents today. And a dollar in two years is worth 0.93 multiplied by 0.93 <\/sup>= 0.86 today. One of the consequences of this approach is that events in the distant future have little relevance today.<\/strong> One dollar of cost or benefit in fifty years is worth less than three cents today. So, the benefits of addressing long-term climate change, for example, seem to have little weight<\/a> today. See the orange line, below.<\/p>\n