Reflection on a method
By Dominique Jacquet
For once, this blog will not be devoted to an event or an operation, but to a method.
The film of the month is dedicated to Afterpay and its acquisition by Square. The first is a remarkable success in the area of split payment (Buy Now, Pay Later) which targets the “Gen-Z” market and other millennials who firmly reject the credit card system and choose deferred payment. which looks a bit like it …
When success comes (Afterpay, but also Klarna and soon PayPal and others), also appear the criticisms against this service which promotes over-indebtedness and creates an addiction to spontaneous consumption, but also the risk of disappearance of this market. by congestion and overuse. How to maintain sustainable value creation in the face of a major risk of exhaustion of a market with defined contours?
Financial theory offers no credible solution. Indeed, the resulting methods focus on the utility of investors who will always consider that it is necessary to catch the fish today because it will probably be gone tomorrow.
Economic theory will suggest a method that combines the socioeconomic approach, the probable interaction between stakeholders (game theory) and the theory of organizations and institutions to, ultimately, propose a governance that is shared and designed by the actors themselves. For the rest, watch the film!
In terms of method, we observe that economics is an essential support for finance.
By broadening the perspective, who among us has never witnessed an investment evaluation process or, worse, an acquisition in which Excel was the center of attention and the figures introduced into this prodigious calculator allowed, once the assistance a little heated, to justify any cost and any decision?
In my courses on firm valuation, I have always explained to my students that this dynamic is called “creating value in Excel” and that it leads to a difficult tomorrow.
The validation of the financial parameters leading to investment decisions must mobilize the economic approach.
Before entering the academic world, I had a serious job, corporate finance executive: Capex controller, treasurer and finally CFO of a company whose purpose was the development of real estate projects for companies. The CEO of the firm always said: “You should never forget that the IRR of a project is called a tenant”. Validating a financial decision then consists of ensuring that the potential tenant exists, that it has a real motivation to come and live in your building and that it has the means to pay, in short, to validate the economic background of the project.
We can always dream on Excel, this allows us to build illusions of value in the short term, and dramatic crises in the medium term.
I suggest that you mobilize economic thinking upstream of the financial calculation.