A platform for a fantasy political party

In no particular order:

Enforce property rights

This includes enforcing contracts, protecting personal property, etc.

Protect the commons

If there are problems of externalities, the government should step in.  The environment, for example.  We all suffer when the environment declines but we're not the people screwing it up.  Make sure that mining operations set aside enough for clean up.  Make sure that lumber operations preserve the forests.  Make sure that farming doesn't create some monocultural wasteland.

Build infrastructure

Protecting the commons is about preventing destruction of common resources.  Building infrastructure is the logical counterpart.  Where everybody benefits but nobody can afford it, the government should build it.  This includes roads, water services, public transportation, IT infrastructure, etc.  How to determine what fits as a positive ROI investment is up for debate.

Break down agency problems

Make sure that people who can reap the benefits of risk-taking are subject to the negative repercussions.  Never let individuals or institutions take risks that they can't absorb themselves.  Make sure that people pay for the wrongs they commit and try to make sure they benefit from the good they do.

Stay out of people's personal lives

The government has no business mandating private issues when they are kept private.  "Private" means that people who don't like what is happening aren't subjected to it against their will.  Religious observation is naturally private.  Sexual orientation is private.  Marriage, the arts, parenting style, recreational activities, etc. are all private as long as the participants are all consenting (and legally able to consent).

First Post

I have no idea if I'll keep going with this, but all things start somewhere.  I am working in the field of corporate decision-making, decision analysis and finance.  My current focus area is portfolio analysis.

The traditional approach to corporate decision finance is to forecast a series of numbers for revenue, costs of sales, research and development and capital spending and then discount those cash flows to come up with an NPV for the project.  Those projects are put in NPV order and a line is drawn when the business runs out of budget.

This approach leaves a lot to be desired.  For one thing, forecasting is hard.  Point estimates of just about anything in the future are likely to be wrong.  We can solve some of that problem by using range estimates and Monte Carlo analysis.  We still need good range estimates, however, and that means relying on either historical regression or experts (or both).  Each of these have their own short-comings, and techniques for compensating for them.

Another problem with this traditional approach is the shortcoming of the NPV approach itself.  A simple thought experiment helps to highlight this:

Imagine a collection of projects:

Project 1: NPV 100, spending 30
Project 2: NPV 70, spending 15
Project 3: NPV 55, spending 10
Project 4: NPV 50, spending 10
Project 5: NPV 45, spending 9
Project 6: NPV 40, spending 8
Project 7: NPV 35, spending 7

If we have a budget of 45, the traditional approach would recommend the top two projects (the highest two NPV projects) for a total NPV of 170.
There are other recommendations that make better sense.  If we instead recommended the bottom five projects, we would also spend 45, but would have a total NPV of 175.

The real world is far more complex than even this.  Unlike a portfolio of financial assets, most business projects have complex interrelationships with one another.  Most businesses have synergies between their different units and add incremental projects to their portfolio of activities because they may have indirect benefits to other projects.  For example, a company that offers a complete suite of personal efficiency software will find that each individual product sells better as part of the whole than any part would if they only offered one or two products (network effects, bundling).  Another example is the idea of cannibalization.

Big businesses often have organizations dedicated to R&D.  These groups develop new technology and create the building blocks that other divisions might bring to market.  Often these building blocks have complicated relationships with one another and with the products that they go into.  Valuing these sorts of efforts from a financial decision-making approach has traditionally been accomplished by doing some sort of allocation or amortization of the spending to the child products.  This approach is inferior, and leads to wrong answers.

I have been working on a new approach to corporate financial decision-making.  In the upcoming weeks I will explore this approach on this blog (or at least try to as time permits).  I plan on skipping subjects that are extensively discussed elsewhere, such as the basics of finance, economics and strategy.  I will write about the fundamental elements of financial analysis, a bit about real options and incremental value and some about biases and heuristics.  I'll write a lot about portfolio and portfolio valuation and decision-making.