B. Principle of Maximum Present Value

When risk was left out of account, it was stated that from among a number of different options the individual would select that one which has the maximum present value—in other words, that one which, compared with its nearest neighbors, possesses a rate of return over cost equal to the rate of time preference, and therefore to the rate of interest.

When the risk element is introduced, it may still be said that the maximum present value is selected, but in translating future uncertain income into present cash value, use must now be made of the probability and caution factors.

But when we try to express this principle of maximum present value in its alternative form in terms of the marginal rate of return over cost, we must qualify this expression to: the marginal rate of anticipated return over cost.

Three consequences follow. First, that the rate of return over cost which will actually be realized may turn out to be widely different from that originally anticipated. Edition: current; Page: [224] Second, there is in the market not simply one single anticipation; there are many, each with a different degree of risk allowed for in it. Third, the need of security may be such as to limit also the choice of options.