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Value and its flip-side, risk, ought to both be stated for a time period

Law departments want to generate value. What is the value of an acquisition? The amount paid to buy a company may be clear, but the worth of the deal depends in part on how far out you look. What is the value of a license agreement? Projected revenue? Possibly, but during what number of years? What value comes from a law firm obtaining a zoning variance? Tell me the number of years to cover in the estimate.

Just as value cannot be begun to be quantified unless you state a period of time in which to accrue returns, neither can risk be assessed, and for the same reasons of timing. How risky is filing a patent application? Depends on when you stop looking into the future. How risky is buying a company? Quantification of both value and risk depend ultimately on what must be an arbitrarily chosen time frame. As Keynes famously wrote, “in the long run we’re all dead.” (And this point about duration leaves out the discount rate you select.)

Value and risk are complements of each other. Future risk diminishes future value; the higher the potential value, the larger the possible risks. Both are suffused with Knightian uncertainty (See my post of Jan. 13, 2006: risk means the probability of an outcome is possible to calculate whereas uncertainty means the probability of an outcome is not possible to determine.). The period of time that we accept or assume for the projection of value obtained or risks run takes on great significance.

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