Future Discounting

An accounting/financing principle that says "a dollar today is worth more than a dollar tomorrow". In other words, you discount future earnings compared to today's earnings. In some ways it is "anti-planning" to some extent, and may account for why managers and owners tend not to focus too much on anything further away than about 18 months. It is controversial whether information technology should be immune to FutureDiscounting logic.

From a financial standpoint ("theory"), the concept seems sound, but bothers many people. One of the reasons for the success of Microsoft is that they took a longer view of things. For example, they sold Windows at a loss for about 5 years in the 80's in order to perfect it and gain market share. FutureDiscounting would be against this. Japanese business thinking also tends to ignore FD. The "Pump-and-dump" nature of shareholder-driven business is sometimes seen as carrying FutureDiscounting too far. It is tough to create good software in a 2-year time-frame, but this is what FutureDiscounting demands more or less (unless it can be shown to pay extremely large future dividends, which is hard to forecast).

Then again, it is said by some that US's comparative advantage is innovation, and innovation requires one to pump-and-dump to pursue that speciality. Japan is known more for incremental perfection, and they are good at it. But that may not be the only survival strategy. In many ways, the US creates or accelerates change, shoves it on the world, and then (tries to) profits from it. It is almost like anti-virus companies writing viruses to sell their product.

FutureDiscounting demands [that] good software [be created] in a 2-year time-frame.

This is an interesting claim. Many companies act as if this is the case. What are the reasons for this? Are there many counter-examples?

The 2 years is only approximate. "Typical" return-on-investment curves generally point to roughly 18 to 24 months turnaround time. As far as the reasons for it, I cannot summarize it easily into a few paragraphs, but instead suggest you consult a college financing textbook. I invite somebody else to summarize the math behind it, if possible. It is one of those concepts that takes a little while to get your head around.

[[ No it is not. But FD is a descriptive theory not a proscriptive one, and is often used to justify a bias which is already established by the terms of the capital markets. As long as the capital markets are the primary source of funding Future Discounting will be an issue. However a sustainable competitive advantage requires one to use a longer term view, and it is often argued that the use of private short term capital markets is in fact a competitive disadvantage to the US. Only time will tell, but it is interesting to note that the US did not achieve its hegemony via future discounting, nor indeed did any other world power in history. If I am right the US will shift its focus from short term capital markets and thus remain competitive or it will not. In which case will be become, like so many before it, a former world power. ]]

[RefactorMe: Should this page be combined with NetPresentValue?]

The concepts are related, but emphasize different things. One cannot replace one topic name with the other as-is without creating additional confusion. One uses NetPresentValue to understand FutureDiscounting. FutureDiscounting is a common pattern found in actual instances of NetPresentValue analysis. It is similar to Optics versus Astigmatism.

ShortTermism? is a very important thing but not only driven by FutureDiscounting IMHO. It occurs much more widely in companies where managers move on rapidly and lack an emphasis on their present role, for example. I think the Japanese difference is more cultural than about accounting --AndrewCates

It could be, but maybe they feed back into each other. Their culture results in them selecting niches that require cultivating hard-won experience, just as the restless cowboy ethic may be what drives the US to chase the Next Big Thing. A comparative advantage will naturally form in areas that require various types of thinking and culture.

Globalization may increase the focus on short turnarounds. Any process that becomes predictable and "stagnant" will probably be moved to a lower-labor-rate country (Possible AmericanCulturalAssumption). The US's "comparative advantage" is generally cutting-edge or experimental products and ideas. Thus, speed to market and experiments that have a high probability of being tossed are part of that. One does not do a lot of long-term thinking on something that has only a 50% chance of surviving.

This is a good thing(.|?)

I did not mean to give it a value judgment. (There are other topics on the merits of it.) The point is that in countries whose economies depend on change, FutureDiscounting may apply more.

A perfect example of this is in a company that has an idea and the following goals: build a product with software backing, sell the product to as many clients as possible, sell the company. Such a company has absolutely no interest in making good (maintainable) software since there is little chance the CEO purchaser of the company is technically literate enough to recognize a rotting code base. The pump and dump process takes advantage of high level misinformed decisions to invest far more in sales than in product quality.

'While this is possible in theory, all of the VentureCapitalist s of my experience have a very thorough technical review process. If you can't prove that, for example, your code has unit and acceptance tests, they'll kill the deal.

There's also business software. Assuming it really would reduce costs or increase revenues or profits, every day until it is deployed is another day of lost profits. You can't go back in time to collect that lost money when it finally is deployed. Deploying sooner starts the payback sooner, and it's cumulative over time. So sooner deployment should be higher yield, assuming the result is at least minimally functional and the costs of bugs are acceptable. Enhancements and refinements can be made later, once (or if) the revenue is streaming in to support them. But what if the revenue doesn't come streaming in? Then hindsight may say that the software should have been perfected before deployment, but that's only one of many possibilities.

Product Lifetime

One scenario that often is overlooked is that apps and systems often get tossed for various reasons. I've seen perfectly good and popular systems go away because of politics, such as changing of the guard.

For example, someone might argue that even though not making a change may save $10k in the short term, that over the span of a decade, the change would save $20k (in today's dollars). However, if there is a 50% chance of that app going wayside due to normal churn, then the benefit should be computed closer to $10k.