The Heretic's Guide to Global Finance by Brett Scott;

Author:Brett Scott; [Scott, Brett]
Language: eng
Format: epub
ISBN: 9781849648806
Publisher: Lightning Source Inc. (Tier 3)

1. Increase its perceived risk (heighten the sour taste).

2. Lower perceptions of its expected returns (reduce the sweet taste).

3. Add moral indignation (load up the spice).

4. Serve all of the above together.

Blagging it on Risk and Return

Investment involves exchanging money (a cost) for a stake in a venture that you believe will yield positive cash flows in the future (a benefit). The amount you have to outlay, relative to those expected future cash flows, gives rise to an expected return: ‘It will cost me £7,000 to cross the desert, but I expect to find £14,000 in the dunes. 100% return. It’s a no-brainer!’

The rationality of investment though, is one of taking risk – outlaying money that you possibly will not get back – in exchange for a return that’s expected to compensate you for that risk: ‘There is a 10 to 20 per cent chance that I will die in the process ... hmm ... is £14,000 worth it? No, I would only go for the possibility of £21,000 ... or if I could reduce the investment cost to £4,600...’ Such an outlook is used to assess whether investment opportunities are good value, or alternatively, what you’d be prepared to pay to invest. Here is another way of conceptualising valuation, incorporating time into the mix:

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