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Isoquant Models to Predict Funding for Private Equity Banks


Today governments use econometric modeling to direct macroeconomic policy. Was the idea of Quantitative Easing decided upon solely using historical information or was it also based on “Consumer Behavior” modeling as well? Indeed, Behavioral Economics was considered. So why don’t private investment banks use economic models including Behavioral Economics to assist them to drive their portfolio base towards specific private investments in disruptive technologies? Because they’re still utilizing 20th century methods vs 21st century analytics. Conversely, imagine utilizing a graphic illustration utilizing “Economic Behavior” as its foundation of analysis. Is the adage, “a picture is worth a thousand words” still valid? Quantitative analytics can offer words aligned with graphic illustrations which evince!

Isoquants are often used in economic models for defining and considering risk behavior. State and Municipal governments use it. Fines are calculated for speeding and deterrence. They have proven statistically that it works very efficiently relative to “the cost” of having thousands more police patrolling the highways. So why wouldn’t private equity banks, trying to fund projects, consider this type of Economic Modeling?

Defining your portfolio base can be extremely valuable when seeking an equity raise for an early stage firm where traditional investors may be risk averse as technologies are evolving at a rate but for regulatory affairs, almost as fast as disruptive communication technologies. Even with clinical trials completed and FDA clearance, first mover disruptive technology may still be fighting off a gold standard technology when they’re reliant upon health care system reimbursements. Those risk averse investors are seasoned and their behavior reflects their history and experience which says “this could be held up by tertiary determinants such as reimbursement even though the regulatory hurdles have been passed. An Isoquant risk behavior model can offer a private equity bank a better assessment of who is prepared to move forward based on the higher rate of return using Isoquant plots using the correct variables.

Regrettably the private equity industry is stuck in 20th century financial models as opposed to real 21st century economic analytics. The majority of major higher educational institutions now offer courses in “Behavioral Economics”. From the LSE to Baruch College at the CUNY, Universities are all now offering these new programs. Consider this, why are there now burgeoning Vocational Technical schools opening up for Drone technology? Because there is growing demand, this is the future. So why are Universities inserting courses in their MBA programs such as Behavioral Economics? Because this is a growth analytic course of study and it offers better outcomes when predicting economic behavior.Should Private Equity banks begin to use this analysis? Yes, if they are seeking better outcomes at lower cost inputs. Whether its money or time, no one can refute better analysis yields better outcomes which translates to higher returns on risks!

Written by Ken Peters PhD

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