Bridge over ocean
1 May 2005 Financial Analysts Journal Volume 61, Issue 3

The Investment Value of an Idea

  1. Jack Treynor

The value of an idea derives from its ability to solve our problems. It ends when a fully developed better idea arrives. No one knows how long development will take, but the probability that the challenger will arrive in a given year is the “mortality rate” for the old champion. We can calculate the present value of the old idea by adding the mortality rate to the market discount rate. The addition of the mortality rate increases the sensitivity of the discounted value to shortterm prospects for the economy.

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