# Re: poly: Why interest rates may stay low

From: Perry E. Metzger <perry@piermont.com>
Date: Sat Feb 28 1998 - 15:54:06 PST

Robin Hanson writes:
> To elaborate on my earlier post, consider the idea of
> a project to design a nanoassembler, and assume that some
> investors looked at that project and decided that that
> average rate of return for this project depended
> on when the project started according to the following table:
>
> Year Return
> 2000 -20%
> 2010 -10%
> 2020 0%
> 2025 5%
> 2030 10%
> 2040 20%
> 2050 25%
> 2060 30%
> 2070 30%

That's a rather odd way of thinking about things.

I don't know any actual investors who delude themselves this way. No
one can reasonably predict future rates of return that far into the
future, and indeed, no one even tries.

Most successful venture firms look for dramatic rates of return over
very short intervals, you know.

(Yes, I know you are just doing an "academic exercise" and we are
should stay quiet and simply make the assumptions
"for purposes of illustration" so that we can get an isolated point
illustrated.

I just have some trouble with the notion that once you've made enough
assumptions that what comes out the other end is interesting in a
predictive sense and doesn't just become an interesting math problem
arbitrarily selected from the space of all math problems.)

> Assume the interest rate remains at 5% over this time,

Is this a realistic assumption? Might anyone making an investment
decision have any idea of what interest rates might be like?

Especially, BTW, given the fact that a large fraction of the
interesting investments dealt with in the real world in the fixed
income markets involve extremely elaborate scenario based planning for
interest rate shifts...

> and for simplicity assume with competing teams the team that
> starts first is almost sure to get the rewards.

Is this a realistic assumption? (At this point, I'm sure you're
screaming "Shut up! I'm trying to make a point here!" -- but so am
I. :)

> With property rights on the right to start this project,
> it might get started in 2050, which might maximize the
> present value of this property right (note that a lower
> return rate that happens earlier can give a better
> present value).

Note that you are utterly discounting the importance of risk analysis
in the decision of the investor. No real investor makes a decision
this way.

> Without property rights, the project should get started
> by one team in 2025, when the return equaled the interest
> rate, making the present value of the project zero.
> Given our assumption of first in wins, it would be a net
> loss for another team to try as well.
>
> Now if there are externalities from this project, the ideal
> social date for the project to start may well be earlier than
> 2050. But whether it is before or after 2025 is hard to say.

Aren't we making assumptions on assumptions on assumptions here? At
this level of hyptothetical, are we sure that the example is in any
way instructive any longer?

> If there is disagreement among investors, with most putting the
> break-even date after 2025, but one putting it at 2025, and
> another putting it before 2025, then this last team should do
> the project just before 2025.

No real group makes decisions this way, you know.

I know. "It was just an example! Can't you be quiet and let the
illustration illuminate the isolated idea I'm trying to explicate?"

Well, no. Since real investors don't make decisons this way, I wonder
about what they know that we don't, as it were.

Perry
Received on Sat Feb 28 23:58:52 1998

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