Subject: Re: A few here may have an opinion on this
From: "Stephen J. Turnbull" <>
Date: Fri, 25 Oct 2002 02:09:43 +0900

>>>>> "Forrest" == Forrest J Cavalier, <Forrest> writes:

    Forrest> Is IRR a metric only for companies that remain in
    Forrest> business?  Does risk get ignored in the calculation?

These are economy-wide numbers from the national income and product
accounts.  So no, and no.

    Forrest> I would think the numbers can't be true on average,

I agree with Larry: few credible projects, of too small scale to
exhaust the VC coffers.

There's also the issue of externalities (eg, the infrastructure
argument).  The economy-wide numbers measure social returns, while VCs
are only interested in the part that they can convert to private

    Forrest> My understanding (very non-expert) was that
    Forrest> microeconomics and macroeconomics were separated due to
    Forrest> the inability to expand the tools, measurements, and
    Forrest> theories of one branch far enough into the other branch
    Forrest> to be accurate.

That's a reasonable story.  But the fundamental accounting principles,
including present value[1], are used in common, and much effort goes
into attempts at partial unification of the fields.

    Forrest> I find it hard to believe you can estimate the value
    Forrest> software or the Internet provides to users, much less
    Forrest> predict the future value that it leads to.

Well, we implicitly construct such estimates every day, by making
decisions that only make sense if one value is bigger than another.
Our ability to come to consensus, or to make accurate measures in
terms of some well-defined unit (such as dollars) is another matter,
but there is a widely accepted body of methods and heuristics (called
"benefit-cost analysis") for making such estimates in the absence of a
convenient yardstick like a market price.

[1]  Technically, the internal rate of return of a project is an
interest rate that makes the expected present discounted value of the
associated stream of costs and revenues equal zero.  The solution need
not be unique, but we carelessly talk about "the" IRR anyway.

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