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I think you are now the one doing the over-thinking. You are applying a model with fixed r, which is wrong because the current low interest rates are temporary

I think you are now the one doing the over-thinking. You are applying a model with fixed r, which is wrong because the current low interest rates are temporary. Forget the interaction between interest rates and risk preference for the moment. Isn't it the case that if interest rates are certain to return to normal in 2 years, then the values of an investment that returns in 5 years, and an investment that returns in 2 years, will be equally affected by current low interest rates?

001sky 13y ago
You are applying a model with fixed r No, this is not true. The whole point is that R=R(r). Its just that the relationship is ~chaotic, not linear. And it gets messy as either r or R --> 0. The fact that preferences are recursive on (r) should not be a surpirse, but I don't think mainstream Economists generally go there. On the topic of "temporary" vs Uncertain changes in (r), they are not the same. One is risk, the other is uncertainty. In general risk is priced a certain way (reasonably efficient), uncertainty is something you have preferences for (ie, you dont "price" it in the normal sense) and can only model indirectly in the first instance.[1] [1] eg, http://economistsview.typepad.com/economistsview/2010/06/risk-versus-uncertainty.html http://economistsview.typepad.com/economistsview/2010/06/ris...