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

Perry M. writes:
>If economic theorists were right, given a 1% shot at a millionfold
>return, people would allocate some of their long term capital
>investment to the 1% shot. The problem is, of course, that no one can
>measure the difference between a 5% shot and a 1% shot and a 0% shot
>accurately -- we have no mechanisms to do such predictions. The result
>is that people stick to stuff where the odds of success are
>sufficiently high that being off by a lot doesn't matter.
>
>If an investment starts showing returns in a few years, you aren't
>going to have to worry much about the business tanking, but stuff that
>will show no return for a century is just too hard to predict.
>
>> People buy bonds that pay off in 50 years now without a problem;
>> they expect to sell them to someone else long before maturity.
>
>And bonds have coupons, and bonds are (shall we say this in chorus?)
>PREDICTABLE. Bonds have highly quantified risk.

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.
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.

Robin Hanson
hanson@econ.berkeley.edu http://hanson.berkeley.edu/
RWJF Health Policy Scholar, Sch. of Public Health 510-643-1884
140 Warren Hall, UC Berkeley, CA 94720-7360 FAX: 510-643-8614
Received on Wed Mar 25 00:32:56 1998