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Yes, hindsight changes perception of past decisions. But there is no "end" to the economy. It ebbs and flows. Maybe today this is "worth" 75% less, but what if

Yes, hindsight changes perception of past decisions. But there is no "end" to the economy. It ebbs and flows. Maybe today this is "worth" 75% less, but what if next year at this time it's "worth" 25% more? Now suddenly it was "worth" even more than you originally paid for it. This it the problem with how you're defining worth: it's going to change depending on when you, in the future, decide to ultimately sell it. But that's not a particularly useful definition of worth. Worth measures a moment in time. We can only price something based on what we know about it today and what we predict about it in the future, and we're not perfect predictors of the future. I think about "worth" using the only definition of worth that is particularly helpful (to me): the amount you could get for the asset if you were to sell it now. Part of that decision almost certainly a prediction of what you believe an asset will be worth in whatever time horizon you plan to sell it. You may be right or wrong about that prediction. But it doesn't change that in the moment at which your purchased the asset, it was "worth" that to you/the market. The reality is that many, many people were under the perception that the value of these assets would continue to appreciate as they were all collectively willing to pay what we now believe to be high prices for them. In hindsight, we may all have been wrong. But in that moment, I could absolutely have sold the asset for the price I paid to purchase it. So it certainly was "worth" that when the transaction happened.

thunky 3y ago
> So it certainly was "worth" that when the transaction happened. Right, but it's also fair to say that in retrospect that the "worth" at the time of the transaction was incorrect since it was based on an estimated prediction of the future (as you said), which ended up being wrong.
SantalBlush 3y ago
>But that's not a particularly useful definition of worth. It is a more useful definition than the one you made up. The error in your argument here is that you are mistakenly conflating the words "worth" and "price". These have different meanings. Price is an objective measure at a specific moment in time. Worth is not. If you choose to use your own personal definition of a word, then you can not have a good-faith discussion with other people who are applying that word's common usage. "Worth" is not the same thing as "price", not even in the field of economics. You just made that up.
- colinmorelli 3y ago
  You're right, I was loose with my words here. Worth does have a specific economic definition, but that definition is not particularly helpful when talking about an asset price like this. It is by definition individual, can only be known once the future happens, and it depends on when the realization of that value ends. This is particularly challenging when the realization of value (rent payments) on the asset (commercial real estate) is inherently volatile itself. In fact, for this very reason, economic value is generally not (usefully) measurable. So in absence of that, buyers will attempt to estimate the future value, and use that as input to the price they're willing to pay. My point in my original comment, which I believe still holds, is that there is no objective truth to this number. Multiple buyers can arrive at different definitions of worth depending on how they used the asset and when they ultimately sold it. And even if they both arrived at the same value, it can only be known in hindsight. For example, say I purchase a stock solely as a monetary investment for $10 today, in 1 year the price drops to $2, and in two years the price jumps to $50. The answer to whether the stock was "worth" what I paid depends on when I decided to sell it. If I had to sell that stock in a year to buy a house, it certainly was not. If I could hold the asset for 2 years, it was certainly worth it (and then some). Or, going back to your example before, if the cash flow was less than I expected - that's not great. But next year it could be more than I expected. The time horizon is a critical component here, as are the factors unique to the individual buyer. Your statement that the property was not worth that much can only be said with the benefit of knowing what the market is today. In 6 months, the asset may be worth 25% more than was paid for it. It's likely that's not the case, but clearly many people thought it was likely the asset would generate more money than it did when it was bought and were wrong. We may also be wrong today. So, when we're talking about the "worth" at the market level we almost have to be talking about willingness to pay. We assume that will price in estimated future value. There's not much else we can usefully measure here.

thunky 3y ago

> So it certainly was "worth" that when the transaction happened. Right, but it's also fair to say that in retrospect that the "worth" at the time of the transaction was incorrect since it was based on an estimated prediction of the future (as you said), which ended up being wrong.

SantalBlush 3y ago

>But that's not a particularly useful definition of worth. It is a more useful definition than the one you made up. The error in your argument here is that you are mistakenly conflating the words "worth" and "price". These have different meanings. Price is an objective measure at a specific moment in time. Worth is not. If you choose to use your own personal definition of a word, then you can not have a good-faith discussion with other people who are applying that word's common usage. "Worth" is not the same thing as "price", not even in the field of economics. You just made that up.

colinmorelli 3y ago
You're right, I was loose with my words here. Worth does have a specific economic definition, but that definition is not particularly helpful when talking about an asset price like this. It is by definition individual, can only be known once the future happens, and it depends on when the realization of that value ends. This is particularly challenging when the realization of value (rent payments) on the asset (commercial real estate) is inherently volatile itself. In fact, for this very reason, economic value is generally not (usefully) measurable. So in absence of that, buyers will attempt to estimate the future value, and use that as input to the price they're willing to pay. My point in my original comment, which I believe still holds, is that there is no objective truth to this number. Multiple buyers can arrive at different definitions of worth depending on how they used the asset and when they ultimately sold it. And even if they both arrived at the same value, it can only be known in hindsight. For example, say I purchase a stock solely as a monetary investment for $10 today, in 1 year the price drops to $2, and in two years the price jumps to $50. The answer to whether the stock was "worth" what I paid depends on when I decided to sell it. If I had to sell that stock in a year to buy a house, it certainly was not. If I could hold the asset for 2 years, it was certainly worth it (and then some). Or, going back to your example before, if the cash flow was less than I expected - that's not great. But next year it could be more than I expected. The time horizon is a critical component here, as are the factors unique to the individual buyer. Your statement that the property was not worth that much can only be said with the benefit of knowing what the market is today. In 6 months, the asset may be worth 25% more than was paid for it. It's likely that's not the case, but clearly many people thought it was likely the asset would generate more money than it did when it was bought and were wrong. We may also be wrong today. So, when we're talking about the "worth" at the market level we almost have to be talking about willingness to pay. We assume that will price in estimated future value. There's not much else we can usefully measure here.