#9. SUMMARY OF THE THREE APPROXIMATIONS (Numbered 1, 2, 3)

TWO INVESTMENT OPPORTUNITY PRINCIPLESA. Empirical Principle

1. [No range of choice available]

2. Each person has a limited range of choice of ( certain ) optional income streams, according to how he uses his labor and other resources

3. " " " " " " " " " ( uncertain ) " " " " " " " " " " " "

B. Principle of Maximum Present Worth

1. [Each person must accept the one income stream available, to be modified only by loans]

2. " " chooses the " " of greatest present worth as reckoned by the market rate of interest.

" " " " " " " " " " " " " " " " (unless loan restrictions prevent).

j ' This Implies (if the Options Vary by Small Gradations) That

2. the anticipated (and realized) marginal rate of return over cost (found by comparing the best and next best options) must equal the rate of interest.

“• but not necessarily " " " " " " " " " " " . " tends toward the particular rate of interest pertaining to the particular set of risks Involved.

TWO IMPATIENCE PRINCIPLESA. Empirical Principle

Each person’s rate of time preference depends on his certain and prescribed income stream, after being (a) prescribed for him

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Each person modifies, by loans, his ( prescribed)

" " " " " (chosen and certain)

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" " " uncertain "

B. Principle of Maximum Desir.abilitt

income stream, converting it into the form most wanted.„ „ „ ° ..

uncertain) anticipated " " "

This Implies That

(a) chosen by " (as per opportunity principle B.) "

(a) " " " " "

and then (b) modified by loans (as per impatience principle B).

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his rate of time preference becomes equal to the rate of interest.

" " " " " tends toward the particular " " " pertaining to the particular set of risks involved.

TWO MARKET PRINCIPLESA. Principle of Clearing the Market

For any given time interval the additions, through loans, to some persons’ real incomes must equal the subtractions from others’.

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B. Principle of Repayment

For any given person the additions, through loans, in some time intervals must be equivalent, in present value, to the subtractions in others.

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