Precautionary Motives for Holding Assets
At least three types of precautionary motives are directly relevant to an agent's demand for assets. (I.) The precautionary saving motive, or prudence, can cause an agent to respond to a risk by accumulating more wealth. (II.) The desire to moderate total exposure to risk, or temperance, can cause an agent to respond to an unavoidable risk by reducing exposure to other risks even when the other risks are statistically independent of the first. (III.) The precautionary demand for liquidity can cause an agent to respond to a risk by holding more money.