What if people were willing to accept higher prices and potentially lower returns for illiquid investments? This could in fact be true for highly illiquid assets. This is why (though the whole article is interesting reading):
If people get that PE is truly volatile but you just don’t see it, what’s all the excitement about? Well, big time multi-year illiquidity and its oft-accompanying pricing opacity may actually be a feature not a bug! Liquid, accurately priced investments let you know precisely how volatile they are and they smack you in the face with it. Yes, yes, volatility is only estimated, and certainly may be an incomplete risk model. You’re overthinking it. , An idea well-known to psychology and behavioral finance is that of “salience.” The basic idea is that if you are observing something you might overreact to it, but if you’re not reminded of it you might tend to ignore it. What if many investors actually realize that this accurate and timely information will make them worse investors as they’ll use that liquidity to panic and redeem at the worst times? What if illiquid, very infrequently and inaccurately priced investments made them better investors as essentially it allows them to ignore such investments given low measured volatility and very modest paper drawdowns? “Ignore” in this case equals “stick with through harrowing times when you might sell if you had to face up to the full losses.”
The Illiquidity Discount?