What drives investment?

What drives investment is a very good question which helps to understand how an economy generates its growth and expands its productive capacity. The safe answer to this question is positive expected profits. Investors are seeking for profits in financial markets, they want to use their wealth as primary generators of more wealth. Then there comes another question how investors decide what project will provide them with positive expected profits.

For some common financial instruments or assets, investors calculate their expected returns based on historical records, or institutions’ preexisting interest rates. However, there are some investable projects which are completely new. Then investors are required to have some professional knowledge to understand how these innovative projects are working. But since some projects are so innovative and cutting edge, investors with fortune may not meet the necessary requirement of knowledge to understand entirely the projects; therefore, they do not have the ability to calculate potential returns and risk. This might not make these investors abandon these projects, they can rely on external information to make their judgement. For example, if the social media is all talking about how solar energy has huge potential and why it is important to develop clean energy, then it raises huge interests for the investors to invest in the solar energy industry or other relevant clean energy field. Moreover, this could create momentum to drive more money into the hot field, thus a higher chance of making profits.

Overall, internal judgement is important for making investment decisions; however, the external environment is also key for investment decision makings, especially in some very new fields.