Decisions in Investing Essay

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Decision making can involve trade-offs between immediate and delayed benefits and costs, especially in the long-term. Impatience causes preferences in the short-term. Future perceptions of how individuals feel about what resources will be available in the long-term as well as socio-demographics play a major role.

Hyperbolic discounting causes investors to desire short-term results (Zou, 2007). This depresses savings and reduces stock demand so stock prices fall and interest rates rise. It dampens the marginal risk effect on stock prices. People drive utility from the act of accumulating wealth. The rate of time grows. The hyperbolic discounting affects how stock prices and interest rates are affected by risk. This results in saving less to reduce stock demand to lower stock prices and raise the risk free rate.

Stock trading creates volatility in the market and creates opportunity for investors to buy low and sell high to make near future profits.

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This volatility creates desires for hyperbolic discounting from investor perceptions of near and far future availability of resources. It allows investors to increase wealth and decrease the expected marginal utility. By doing so, investors play a part in reducing stock demand and prices to raise interest rates for future growth in wealth accumulation.

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