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Dec 28, 2022Liked by Andy Preston

I think it's correct to say that stocks (and all assets) are less risky as T gets large under most useful definitions of risk. For example, as T gets large (assuming avg return on stocks is 6%) the probability of losing money goes to zero, as does the probability of losing to a lower-return asset. For most people this means its pretty low risk to invest in stocks long-term. Obviously the variance of total returns does grow (assuming no neg. autocorrelation), but the average annual returns converges to the 'true' expected annual return of the asset.

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Standard utility functions seem lacking. People get utility from more than just consumption. To get a realistic utility function, I'd propose the following changes.

The utility function should depend on savings rates, wealth, and work-based income in addition to consumption. People get utility from a high savings rates, especially at low wealth levels. And that diminishes as wealth increases. People get disutility from work (proxied by work-based income), and the disutility rises as wealth rises.

These change reflect real world preferences. Young people enjoy saving a lot of money because young people are unsure of their future earnings potential, and they're used to low consumption. Plus, consuming a lot before you've "earned" the right to consume a lot feels immoral. As people become wealthier, they are less concerned with saving money, and are more willing to spend. And as people become wealthier, they are less interested in paid work. What do you think?

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To what degree does James Choi represent mainstream economic consensus?

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