Re: poly: On Simple Models (Was: Why interest rates may stay low)

Robin Hanson writes:
> I am invoking the idea that possible investment projects must compete with
> each other for funding, and that a major criteria investors use in comparing
> them is the rate of return they expect to get.

One would have to be stupid to disagree with that. Its a very simple
result -- one that I believe we've all had as part of our
consciousness for some time and which we no longer even bother to
mention.

> I don't see why this is a "bizarre" mechanism,

That isn't a bizarre mechanism. Sitting down and attempting to produce
ten and twenty year estimates of exact rates of return of a project
that involves technical risks and which has not been started is a
bizarre mechanism.

Pretending that we can exactly measure the rates of return in 1890 or
1650 also seemed a bit odd. You were claiming that rates of return
haven't changed -- I challenged people to find a way to actually
measure that.

> nor the relevance of asking how return should best be measured.

If you are going to merely claim that businessmen take into account
the expected returns on an investment and pick the one they think will
pay off the best, I believe that is totally uncontraversial.

If, on the other hand, you start discussing "historical rates of
return" etc., I start having an alarm go off.

> >Why would we really expect the result to be radically different
> >if people have property rights in their investment?
>
> If you found it plausible that investments become more and more
> attractive with time (over some range), by offering higher and higher
> returns, then you should find it plausible that the returns would be
> higher if investments were postponed due to property rights.

You wouldn't always expect that -- indeed, you often would not expect
that. For instance, if I am investing in a radio broadcast license (we
will ignore whether such licensing is desirable right now), the cost
of the license these days is generally nicely proportional to the
expectations on the part of bidders of their likely return on
investment.

Perry
Received on Tue Mar 3 21:32:38 1998