Re: poly: Re: Why interest rates may stay low

Robin Hanson writes:
> There are two things that might discourage investment: uncertainty
> about the rate of return, and the time to get the return. We agree that
> uncertainty about the return can discourage investment. The question
> is how much the time to get a return is an additional discouragement.

If the rate of return is very certain, extremely long periods of time
to get a return are acceptable, because the market will value the
investment in a nice smooth and predictable way, so even a 100 year
bond can be sold within the investor's lifetime at a reasonable
profit.

If the rate of return is very uncertain, a short investment may be
worth a "gamble", since at worst you are out within a short time, but
a long one is simply too hard to figure out -- there will be no exit
strategy for the investor.

> It seems to me that the hypothesis to knock down is that investors
> are shy about long-term investments mainly because such investments
> are also typically very uncertain. I don't see that you've offered
> any reasons to think that the time itself is important, beyond the
> uncertainty that usually goes with it.

I never argued that the uncertainty wasn't a primary problem there --
but of course, we are talking about VERY speculative investments
here. Long time scales have a synergistic bad effect -- without a way
to quantify the likely rate of return, we might as well have a low or
nonexistant rate of return if the investment is far enough off. If you
are risking the money for two years, that isn't a big deal, but it is
different if you are risking it for three hundred.

Perry
Received on Wed Mar 25 04:03:53 1998