How would you invest? An interesting microeconomic scenario

http://www.knowingandmaking.com/2009/02/confiscated-savings-and-bank-runs.html


The problem is much deeper than that. The loss averse individual you describe makes two mistakes not one. The second, as you describe might be to withdraw his or her money, but the first was to invest the money in the first place.

Most people do not have the market knowledge to invest their money properly. If this individual was looking for principal protection, then he or she should not have invested the money in an account where it could be lost.

In the United States, many retirees or other investors with no risk appetite invested their money in bonds of Enron or other highly rated companies without understanding that highly rated does not mean risk-free, and that the rating agencies are not actually good at their jobs. Then these same investors were upset that they lost money that they thought was risk free.
As recently as 2004, President Bush advocating the conversion of Social Security into personal accounts where workers could invest in "a conservative mix of stocks and bonds". All of these people would be in a great deal of trouble today if this change had taken place.

Lastly, the individual you describe could have been cheated. Perhaps he was told that this was a deposit in a bank. The word "bank" for common people means "safe". In truth, the practice of fractional reserve banking means that the bank is not safe and depends on a Ponzi scheme for its liquidity. Fractional reserve banking is what makes a bank vulnerable to bank runs. Fractional reserve banking is what causes dramatic swings in liquidity during recession (and not individuals collectively saving).