"Suppose some promoter comes along with a new financial asset. The promoter promises that you will never lose money if you invest your savings in this new financial asset. Even better, he promises that he will buy back that financial asset at the issue price any time you ask him to. And suppose all the people who suffer from nominal-loss-aversion take him up on his offer, and buy the new financial asset."There is clearly some political power involved here. However, this is not the whole story. The safe assets are being swallowed up by overseas central banks as a parking space for US dollars accumulated as a result of foreign exchange intervention. This means that the return on the safe asset is not longer a compensation for real losses (it does just about cover nominal loss). As such there is a demand for a safe asset with a higher return. It may be impossible, but where there is demand, there is supply.
Saturday, January 04, 2014
Risk, money illusion and new financial assets
Worthwhile Canadian Initiative: Nominal-loss-aversion and its consequences: