You are equating what is normally called "intangible assets" with the "bezel". I presume this is deliberately provocative.

Deliberate, yes. Provocative, perhaps. Deliberately provocative, no.

The reason that I lump together justified and unjustified expectations of future gains is that, in the snapshot that the balance sheet represents, there is no way to tell the two apart in any manner that is both objective and precise at the same time. Nor is it relevant to the phenomena that I designed the model to analyse.

Take a company that is leveraged 4:1 and capitalised at 150 % times its liquidation value on the expectation of future earnings - that is, it has a bezzle of +50 % of its liquidation value and an equity of +37.5 % of its liquidation value. So if its bezzle shrinks below +37.5 % of its liquidation value for whatever reason, its creditors will start liquidating it in order to avoid being left as the last creditor holding claims on an insolvent institution.

The original bezzle could have been perfectly justified, based on what everybody knew or could reasonably know at the time. The new bezzle could also be completely justified, due to changes in market conditions. Or one or both could be entirely due to the overactive imagination of stock market speculators. That doesn't matter, because all that the creditors see is that the company's stock just went to zero, which is a signal for them to start sending out margin calls.

Or take a company that, due to the prevalent discount rate on the money markets, has a negative bezzle - that is, the liquidation of its plant and the sale of its patents would give more money than the money markets are prepared to pay for the future cash flow that they believe the company will generate. In that case, the company will be targeted for liquidation by corporate raiders. And it really doesn't matter whether the negative bezzle is justified on the basis of the company having an unsound business model, or the negative bezzle is due to unjustified required rates of return on money or even due exclusively to overactive pessimism on part of the stockholders.

(Of course the story about corporate raiding is a little more complicated, because it's also a story of corporate raiders exploiting loopholes in the law to liquidate companies without paying out their deferred expenses, like pensions, in full. Obviously, the ability to shaft creditors during the liquidation of an otherwise solvent company creates an incentive to liquidate perfectly sound going concerns.)

So separating the bezzle into a justified part based on brand recognition, organisation, business models and so on versus an unjustified one based on hype, glamour and mysticism does not, I think, add sufficient analytical power to the model to compensate for the demarcation problem it introduces.

Nitzan and Bichler include a term for "hype", a coefficient that accounts for differences between "actual" value and the value that the market assigns to assets when they are capitalized and discounted to present value. The hype can be above or below unity.

How do they determine the "actual" value? The actual value of an asset depends on the expectations, plans and strategies for the future, as well as the applied discount rate. Now, the future can be guessed at, studied or planned for, but the discount rate is (in part) an explicitly political parameter that has no objectively true value.

And there is another advantage of separating the intangible assets from the physical assets: If you want to model the cascading collapse during a financial panic, explicit bezzles are more illustrative and mathematically convenient (or at least I think so) than dealing with multipliers on asset values.

Additionally, it is possible to be an economic actor with no tangible assets - a company that deals entirely in financial assets and rents its buildings and equipment would have no physical portfolio to apply the multiplier to. Yet presumably it has a positive bezzle - if it did not, we could not expect it to remain a going concern, per the discussion of corporate raiding above.

- Jake

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