Tuesday, June 23, 2009

the idea of investment value

we often speak of some sacrifice that we make as "investment in the future." parents give up their time and resources now so that their children may go to college later. students (sometimes) give up concerts, parties, or other recreation to improve their academic outcomes later. In both cases the individuals are judging that the value of what is gained exceeds the immediate cost being paid. It is in this sense that we use the term investment. Any decision that involves significant costs now for the sake of future benefits requires a judgment about the value of the future benefits. we refer to such a decision as an investment decision and the value of the expected future benefits as investment value. the important of this concept is that every investment decision involves the same two elements: the initial costs and the value of the future benefits. Making good investment decisions is important because, by their nature, they cannot be undone easily or without cost. there are more of these investment decisions than one commonly thinks, as we will show below.
Not every decision is worth treating as an investment. Decisions such as what music CD to listen to, what flavor of ice cream to choose, what to wear for the day, or how to organize an immediate work task lack one or more components of the investment value problem. For example, these decisions commonly lack a significant cost at the time they are made. Moreover , the time horizon is very short, and the decision can be reevaluated and revised very quickly, so one is not forced to live with the choice over along time.
But many decision in daily life do involve an investment. the decision to purchase an expensive television set or stereo certainly is an investment. there are significant costs up front, typically the benefits are spread over several years, and the choice cannot be " undone" (after some days) without significant costs. Similarly, purchasing expensive furniture or clothing is an investment. so also is the decision to upgrade a computer, replace a car, or change apartments. the choice to attend a college or university is major life investment, as is the choice among schools and programs of study. Selecting a certain college course, to the exclusion of another, is an investment. The decision to change jobs can be a major investment, especially as one progresses further along a career path and perhaps also takes on increasing family and personal responsibilities. A commitment to fair, honest, and generous business practices is understood by wise businesspersons to be an investment in future business relationships.In all of the cases above , the immediate cost of an action must be weighed against the (investment) value of future resulting benefits.

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