Valuation of Assets

Asset valuation, critical for successful investing, requires identifying what determines "market" value.

What, then, is market value?

There is alpha, beta, and what I call "gamma" risk.

Political economists utilize analytical modeling to achieve predictive utility. If predictive accuracy is lacking, it is probably due to using the wrong analytical model. Error is likely reduced by changing the analytical model being applied. Actors in the marketplace are unlikely to switch practical models because modeling provides predictable results and also satisfies consistent philosophical considerations to achieve a normative legitimacy of the means and ends that also affects the outcome in some very unpredictable ways.

Actors in the marketplace are likely to have a consistent application of a practical model to reduce the probability of outcomes to what appear to be random variables that are usually a "gama" risk. The gama risk is reduced to a political gaming of economic variables to produce a predictable outcome that has a normative legitimacy. This does not mean that identifying the gama risk is not a technical function to be quantitatively ignored. That is a critical error. Rather, it is a technical function of properly applying an analytical model. Proper modeling renders what seems an inscrutable vectoring of willful actors and organized technologies into an easily predictable phenomenon at the micro or macro scale of analysis.

Much of the analysis at griffithlighton.blogspot.com, whether normative or technical, descriptive or prescriptive, proceeds from choosing an analytical model to not only accurately describe and explain valuations, whether moral or monetary, but to achieve a predictive utility.

It is a mistake to ignore moral valuations, for example. It is fundamental to practical modeling that is used to shape what "the market" determines to have value. The public and private sectors operate with different normative properties that largely determines organizational, size, shape and cultural attributes that if not accurately modeled, a predictive utility will be achieved only by accident (randomness).

Where the public and private sectors intersect is where the gama risk essentially resides, and where the appropriate analytical modeling describes, explains and predicts what are normatively called "market distortions" that effect the outcome--what the value really is at any time. Recognizing the normative aspect of the gama risk technically reduces the error endemic to quantitative analysis and punctuated events of predictive failure.

Utilizing the appropriate practical, analytical model, for example, renders the current economic "crisis" not a crisis at all, but a fully expected, "normal" (normative) outcome. If it is expected, it could have been prevented, but that would require abandonment of the working practical model that determines the outcome. Not abandoning the model, and the expected outcome, is a normative consideration--because it would be the "wrong," the aberrant, thing to do; it would be impractical, and the normative consideration (the value it represents) is to be fully, analytically, expected with a technical value of about $4 trillion to date. The magnitude of this technical value, and the effects, like a public-private solution (the gama-risk valuation of assets), is too easily predictable as long as the analyst is willing to empirically apply the appropriate analytical model.

If the analyst considers the plans of Geitner and Bernanke a "market distortion" of valuation, it is a normative invocation of the pluralist model that does not predict the real (expected) value of the assets, but may very well suggest an expectation of value in the future based on the normative valuation (a retrace of the value). This suggests a mixed model in operation: an elitist and pluralist model in combination, rendering a bureaucratic analytical model of political economy. The analyst may hedge the gama risk utilizing this model (see the article, "Restructuring the Elements of Power" at griffithlighton.blogspot.com).