Quote:
Originally Posted by BrianTheMick2
We have hyperbolic discounting of future utility regardless of risk/reward. It is just time preference (wiki it).
sure, I'll admit this is correct but simply because the risk/reward is kinda hard to assess - there are rarely fixed outcomes in life, it's a distribution - so ppl replace that with a big question mark and put it into the noise section in their discounting equation
ppl simply discount based on the information they have and most of them have no information/knowledge so it boils down to a time preference discount as you point out....
Quote:
Originally Posted by BrianTheMick2
I find present utility in saving to be greater than present utility in consuming.
that's bcs you have everything you need on the utility curve and extra consumption is simply below marginal for you so you wait until something exciting comes along (hmmm... new anti-aging method maybe?)
but most ppl don't have their utility covered* (nice job, car, chick, guy, vacation home, friends, monetary cushion, food, safe neighborhood etc.), and since** the game is relative status, they consume more then their purchasing power allows expanding the credit bubble to obtain those assets - or to be precise to get the emotional positive feedback in their brains from obtaining those assets
*note: note everyone has the same utility curve but for the sake of argument, lets assume a normal distribution around the average joe utility curve
**here I go again
Quote:
Originally Posted by BTM
The list is endless (LTCM is my favorite as they keep me from doing stupid things that I'm tempted to do). The problem is that we are working against our nature when we expect people working for companies to be risk averse. We reward outperformance. Hedging risk properly doesn't make you a big payday.
a little detour: banking and buyout of domestic government bonds is simply a long term relationship where the bank gets a free cushion on gov default
a little detour_v2: this is mostly dominant in risk management - there is a incentive to over-leverage with OPM - ride the bonus wave when everything is good, blame the market when you fall crashing down and retire in 5-10 years
I'm pretty sure you knew this but just in case....
Last edited by Rikers; 10-04-2013 at 02:39 PM.