The reduction comes from the passage of time. Let’s say that a company predicts 10% growth over the year but 6 months into the year they have an equivalent annual growth rate of 2%. That doesn’t mean that they won’t make 10% at the end of the year, but it makes it less likely, so the value of the company changes to reflect that new reality.
It’s important to define risk and uncertainty. Risk in this case means probability of winning or loosing something, and can be measured, whereas uncertainty is about the lack of information about a situation and can not be measured as it is unknown. Uncertainty is reduced as more knowledge is gained about reality and as long-term risks become short-term risks, due to the passage of time, only to be replaced with new longer term
risks.
There are some really interesting concepts around the future value of money, opportunity costs and how to value companies. I’d recommend coursera finance 101 courses.
The reduction comes from the passage of time. Let’s say that a company predicts 10% growth over the year but 6 months into the year they have an equivalent annual growth rate of 2%. That doesn’t mean that they won’t make 10% at the end of the year, but it makes it less likely, so the value of the company changes to reflect that new reality. It’s important to define risk and uncertainty. Risk in this case means probability of winning or loosing something, and can be measured, whereas uncertainty is about the lack of information about a situation and can not be measured as it is unknown. Uncertainty is reduced as more knowledge is gained about reality and as long-term risks become short-term risks, due to the passage of time, only to be replaced with new longer term risks. There are some really interesting concepts around the future value of money, opportunity costs and how to value companies. I’d recommend coursera finance 101 courses.