THE THEORY OF INTEREST

Second, there is in the market not simply one single an-ticipation; there are many, each with a different degreeof risk allowed for in it. Third, the need of security maybe such as to limit also the choice of options.

THE TWO PRINCIPLES AS TO IMPATIENCEA. Empirical Principle

The rate of time preference depends upon the characterof the income stream, but it must now take into ac-count the fact that both the immediate and the future(especially the future) portions of that stream are sub-ject to risk. There are many rates of time preference, orimpatience, according to the risks involved. But they alldepend on the character of the expected and possible in-come stream of each individual—its size, shape, compo-sition and especially the degree of uncertainty attachingto various parts of it as well as the degree of uncertaintyof life of the recipient.

B. The Principle of Maximum Desirability

It is still true, of course, that the individual decideson the option most wanted. But, in a world .of uncer-tainty there are two features not present in a world ofcertainty. One (which however does not affect the formu-lation of the principle) is that what is now desired mayprove disappointing. That is, though it seems, whenchosen, the most desirable course, it may not prove themost desirable in the sense of deserving, in view of laterdevelopments, to be desired. The other new feature is thatthe most desired income stream is no longer necessarilysynonymous with that which harmonizes the rate ofpreference with the rate of interest.

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