What Drives Us to Invest?

I had made the journey from economics to finance. As part of Keynesian economics, we were taught about the three motives to hold money: the transactions motive, the precautionary motive and the speculative motive; all through my teaching career that remained part of my Keynesian economics. But two decades, later when I immersed myself into the world of investment, I had to develop my own tools to understand the new discipline and make my investors understand the working of their own minds. One night as lay turning on my back, poring over the day’s happenings, suddenly I made a strong connection between what I had studied years back and the problem I was grappling with now: the motives.

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It suddenly dawned on me that Keynes’ three motives to hold money made perfect sense in the context of investment; I could very well re-interpret them as three motives for investment.

Our income flows in a certain pattern; so does our expenditure. The patterns may differ from person to person. But what is important is that the two flows rarely match; sometimes we have in our hands more income than we need to spend, and sometimes the other way round. The time period we are talking about may be a month or a lifetime. So we need something to hold our excess income so that it can be used when our expenses are in excess. That is the first reason we invest; investment then becomes a fridge or a deep freezer (depending upon how long we need to conserve that income) where we can preserve our income. ‘Fridge’ is usually the savings account; fixed deposits, bonds & debentures, MF products and equity shares would fall in the category of ‘deep freezers’. That is the Transactions Motive for investment — investment to provide for future transactions.