allen on Nostr: ooo that’s a super fun question. so the main different is the dimensionality: ...
ooo that’s a super fun question. so the main different is the dimensionality: economics stocks have the dimension of $, whereas flows have the dimension $/t.
this is academic in some senses, but the point I am getting at in the piece is to properly understand *time and causation*. the flows can only happen because they are created by stocks, and you need the stocks first. once you have them, the flows play out over time, and allow you to replenish the stocks.
this is the gist of the “economic potential energy” metaphor: the stocks can be transformed into something more useful or even consumable, but it takes purposeful action and time to get there.
in terms of valuation, yeah it’s probably best to use NPV, but I’d argue it’s better still to just admit you don’t know. if you bake in “uncertainty” as another foundational concept, you realise you can’t possibly know what these future flows are going to be.
rounding off your question, though, this presents a super interesting contrast in terms of the dimensionality: if the argument is you want to sum up a bunch of flows, then yes, that forces the stock to be “worth” an amount with dimension $/t. but then that kinda has to be the case because you aren’t actually *getting* this value now. it doesn’t exist in any tangible form. you are getting it over the period of time you discount over. whereas if you say “I don’t know” (as I recommend) you mark it at book value ($) and move on.
this is academic in some senses, but the point I am getting at in the piece is to properly understand *time and causation*. the flows can only happen because they are created by stocks, and you need the stocks first. once you have them, the flows play out over time, and allow you to replenish the stocks.
this is the gist of the “economic potential energy” metaphor: the stocks can be transformed into something more useful or even consumable, but it takes purposeful action and time to get there.
in terms of valuation, yeah it’s probably best to use NPV, but I’d argue it’s better still to just admit you don’t know. if you bake in “uncertainty” as another foundational concept, you realise you can’t possibly know what these future flows are going to be.
rounding off your question, though, this presents a super interesting contrast in terms of the dimensionality: if the argument is you want to sum up a bunch of flows, then yes, that forces the stock to be “worth” an amount with dimension $/t. but then that kinda has to be the case because you aren’t actually *getting* this value now. it doesn’t exist in any tangible form. you are getting it over the period of time you discount over. whereas if you say “I don’t know” (as I recommend) you mark it at book value ($) and move on.