liquidity preference theory argues that people prefer to keep assets in a liquid form such as cash rather than in less liquid assets like bonds stocks or real estate the upshot is that investors expect a greater premium for taking on a longer term loss of liquidity 
this inclination is primarily due to the uncertainty of the future individuals businesses and investors can better navigate unforeseen financial and economic changes especially during crises by holding liquid assets investopedia jake shithere s a tradeoff however between holding cash that offers liquidity but no returns versus bonds that provide interest or returns but are less liquid the interest rate is effectively the reward that investors demand to part with liquidity and hold less liquid assets like bonds liquidity preference theory says that interest rates adjust to balance the desire to hold cash against less liquid assets the more people prefer liquidity the higher interest rates must rise to make them willing to hold bonds the theory views interest rates as a payment for parting with liquidity 