In his latest 2020 letter to shareholders, Jamie Dimon discusses a number of topics including why net present value analysis fails to capture ‘true’ value. Here’s an excerpt from the letter:
While I am fanatical about detail and multi-year analysis, it’s important to be cautious about its application. Assumptions are frequently involved, and small changes in a few variables can dramatically change an outcome.
Even net present value analysis fails to capture the true value of something after a certain period of time. For instance, people commonly look at the five-year net present value of a customer acquisition, which can mask the true compounding effect of keeping that client for 20 years. And we have often seen net present value analysis fail to capture ancillary benefits (like customer happiness) that can often be more important than the analysis itself.
Sometimes a new product or an investment should simply be considered table stakes – meaning there’s no need to do analysis at all. Think about banks adding the capability of opening new accounts digitally, for example, or maintaining a strong technology infrastructure and adopting new technologies, like cloud or artificial intelligence (AI). These could be life-or-death decisions for a company, so instead of focusing on net present value, the emphasis should be on getting the work done properly, efficiently and quickly.
Bureaucrats can torture people with analysis, stifling innovation, new products, testing and intuition.
You can read the entire letter here:
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