Economic and social institutions are formed to
last. People embark on long term projects and make enduring decisions -
for instance, to invest money in stocks or bonds - even when they are
very old.
Childless octogenarian inventors defend their fair share of royalties
with youthful ferocity and tenacity. Businessmen amass superfluous
wealth and collectors bid in auctions regardless of their age. We all -
particularly economists - seem to deny the prospect of death.
Examples of this denial abound in the dismal science:
Consider the invention of the limited liability corporation. While its
founders are mortals - the company itself is immortal. It is only one
of a group of legal instruments - the will and the estate, for instance
- that survive a person's demise. Economic theories assume that humans
- or maybe humanity - are immortal and, thus, possessed of an infinite
horizon.
Valuation models often discount an infinite stream of future dividends
or interest payments to obtain the present value of a security.
Even in the current bear market, the average multiple of the p/e -
price to earnings - ratio is 45. This means that the average investor
is willing to wait more than 60 years to recoup his investment
(assuming capital gains tax of 35 percent).
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