Time horizon
Encyclopedia
A time horizon, also known as a planning horizon, is a fixed point of time in the future at which point certain processes will be evaluated or assumed to end. It is necessary in an accounting
, finance
or risk management
regime to assign such a fixed horizon time so that alternatives can be evaluated for performance over the same period of time. A time horizon is a physical impossibility in the real world.
Although short term horizons such as end of day
, end of week, end of month matter in accounting, generally it is mere summing-up and the simplest mark to market
processes that take place at these short term horizons. No scenario analysis
or mark to future activities are usually undertaken for such short periods, except for very large portfolios.
The most common horizons used in planning are one "quarter" (a quarter year, or three months), a year, two years, three years, four years (especially in a representative democracy
where this is a quite common term of office
and election cycle) and five years (in corporate planning). More far-sighted companies and government agencies may also use between ten and one hundred years. Thirty years is often used in mortgage
contracts and US Treasury bonds such as the long bond. One hundred years, sometimes considered equal to seven generations, is a time horizon often cited by the ancient Iroquois
and modern Greens
. The Forestry Commission
in the UK plans over a century into the future. There are Japanese corporations rumoured to have five-hundred year plans, which amount to a sort of official science fiction
story or myth
to which the company commits itself - these are highly secret and have not been confirmed to exist.
Agreeing on a common time horizon for action is particularly important in global policy, as each participant will have very different time horizon habits. Achieving simultaneous policy
is quite difficult without an agreement, as those taking action early may be seriously disadvantaged in competition with those taking action late on a regulatory matter.
Also, in terms of physics, the term "time horizon" is also synonymous with event horizon
, first identified in Steven Hawking's A Brief History of Time
. Hawking stated that the time horizon is the boundary that separates a black hole
from other celestial bodies. Even time and light cannot escape once trapped in the black hole.
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...
, finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
or risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
regime to assign such a fixed horizon time so that alternatives can be evaluated for performance over the same period of time. A time horizon is a physical impossibility in the real world.
Although short term horizons such as end of day
End Of Day
End of day, end of business, close of business or COB is the end of the trading day in financial markets, the point when trading ceases. In some markets it is actually defined as the point in time a few minutes prior to the actual cessation of trading, when the regular traders' orders are no longer...
, end of week, end of month matter in accounting, generally it is mere summing-up and the simplest mark to market
Mark to market
Mark-to-market or fair value accounting refers to accounting for the fair value of an asset or liability based on the current market price of the asset or liability, or for similar assets and liabilities, or based on another objectively assessed "fair" value...
processes that take place at these short term horizons. No scenario analysis
Scenario analysis
Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes . Thus, the scenario analysis, which is a main method of projections, does not try to show one exact picture of the future. Instead, it presents consciously several alternative future...
or mark to future activities are usually undertaken for such short periods, except for very large portfolios.
The most common horizons used in planning are one "quarter" (a quarter year, or three months), a year, two years, three years, four years (especially in a representative democracy
Representative democracy
Representative democracy is a form of government founded on the principle of elected individuals representing the people, as opposed to autocracy and direct democracy...
where this is a quite common term of office
Term of office
Term of office or term in office refers to the length of time a person serves in a particular office.-Prime Minister:In the United Kingdom, the Prime Minister has no term limits...
and election cycle) and five years (in corporate planning). More far-sighted companies and government agencies may also use between ten and one hundred years. Thirty years is often used in mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
contracts and US Treasury bonds such as the long bond. One hundred years, sometimes considered equal to seven generations, is a time horizon often cited by the ancient Iroquois
Iroquois
The Iroquois , also known as the Haudenosaunee or the "People of the Longhouse", are an association of several tribes of indigenous people of North America...
and modern Greens
Green Movement
The Green Movement refers to a series of actions after the 2009 Iranian presidential election, in which protesters demanded the removal of Mahmoud Ahmadinejad from office...
. The Forestry Commission
Forestry Commission
The Forestry Commission is a non-ministerial government department responsible for forestry in Great Britain. Its mission is to protect and expand Britain's forests and woodlands and increase their value to society and the environment....
in the UK plans over a century into the future. There are Japanese corporations rumoured to have five-hundred year plans, which amount to a sort of official science fiction
Science fiction
Science fiction is a genre of fiction dealing with imaginary but more or less plausible content such as future settings, futuristic science and technology, space travel, aliens, and paranormal abilities...
story or myth
Mythology
The term mythology can refer either to the study of myths, or to a body or collection of myths. As examples, comparative mythology is the study of connections between myths from different cultures, whereas Greek mythology is the body of myths from ancient Greece...
to which the company commits itself - these are highly secret and have not been confirmed to exist.
Agreeing on a common time horizon for action is particularly important in global policy, as each participant will have very different time horizon habits. Achieving simultaneous policy
Simultaneous policy
Simultaneous policy requires governments in all jurisdictions at once, worldwide, to implement a policy shift at once, so that none is disadvantaged or unfairly advantaged....
is quite difficult without an agreement, as those taking action early may be seriously disadvantaged in competition with those taking action late on a regulatory matter.
Also, in terms of physics, the term "time horizon" is also synonymous with event horizon
Event horizon
In general relativity, an event horizon is a boundary in spacetime beyond which events cannot affect an outside observer. In layman's terms it is defined as "the point of no return" i.e. the point at which the gravitational pull becomes so great as to make escape impossible. The most common case...
, first identified in Steven Hawking's A Brief History of Time
A Brief History of Time
A Brief History of Time is a popular science book written by renown physicist Stephen Hawking and first published by the Bantam Dell Publishing Group in 1988. It became a best-seller and has sold more than 10 million copies...
. Hawking stated that the time horizon is the boundary that separates a black hole
Black hole
A black hole is a region of spacetime from which nothing, not even light, can escape. The theory of general relativity predicts that a sufficiently compact mass will deform spacetime to form a black hole. Around a black hole there is a mathematically defined surface called an event horizon that...
from other celestial bodies. Even time and light cannot escape once trapped in the black hole.
See also
- Gap financingGap financingGap Financing is a term mostly associated with mortgage loans or property loans. It is an interim loan given to finance the difference between the floor loan and the maximum permanent loan as committed....
- Long term
- Race to the bottomRace to the bottomA race to the bottom is a socio-economic concept that is argued to occur between countries as an outcome of regulatory competition, progressive taxation policies and social welfare spending...
- Timetable (disambiguation)