Ad hoc risk-adjusted discount rates can swing investment decisions arbitrarily.

Evidence

The main difficulty was how to deal with future cash flows that were uncertain. The guidance Treynor had received from his professors at the Harvard Business School (from which he graduated with an MBA in 1955) seemed to him to fudge the issue. It “wasn’t very satisfactory. They were basically saying `well, choose the discount rate to take risk into account.’ It was obvious to anybody that, depending on which risk discount rate you chose, you could get … radically different present values and that would either lean you toward going ahead with a project or not, and so that troubled me. It just didn’t seem like an adequate answer.” — Donald MacKenzie, An Engine, Not a Camera, 562

Categorization

• SEED: Angle: how a career-defining theory was triggered by dissatisfaction with a fudge — the role of felt inadequacy in paradigm shifts.
• XREF: connects to: Capital budgeting decisions hinge on the discount rate applied to future cash flows. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 561

Broader Connections

• Capital budgeting decisions hinge on the discount rate applied to future cash flows. #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 561