Markets do not select for a liquidity preference as behavior towards risk

Tobin (1958, The Review of Economic Studies 25, 65-86) has argued that in the face of potential capital losses on bonds it is reasonable to hold cash as a means to transfer wealth over time. It is shown that in a model without consumption this assertion cannot be sustained when focusing on the evolution of the wealth of cash holders versus non-cash holders. Cash holders will be driven out of the market in the long run by traders who only use a (risky) long-lived asset to transfer wealth. Similarly, in a model with a bond instead of cash, depending on the way consumption is modeled, bond holders do not survive in the presence of pure stock holders.