Risk

Malthusian

On the subject of parallels between medical risk and investment risk: a while ago I read the leaflet that came with my partner's medication. It didn't just list side effects but the probabilities associated with them: "1 in 10 people experience headaches, 1 in 10,000 people experience severe allergic reactions, 1 in 1,000,000 people die after taking this drug" that kind of thing.

In the world of regulated financial products this leaflet would be unacceptable, on the basis that ordinary people have no understanding of the concept of 1 in 10,000 or 1 in a million. The Financial Conduct Authority's view is that people don't even understand percentages (meaning any %-based charges also have to be declared in pounds and pence).

The logic behind the leaflet is clear enough. Once someone's read it they'll be fully informed, and they'll either take the pill and their chances, or they'll be too afraid, and will just have to live with the medical condition. But this logic ignores that the punter isn't really fully informed, because they don't know whether they're one of the 1 in a million people whose body, for whatever reason, is wired in a way that means if they take the pill they'll die.

The point of the leaflet isn't to help people make good decisions, it's to make it easier to live with the one they've made (whether to take the pill because it feels safe or not because it feels too risky). Which is another way of saying it's to make it easier to live with the risk you take - the risk of experiencing side-effects or the risk of living with the condition. The idea that it's to help them make a better decision ignores the fact that people have neither the data about their own body they would need for that, nor the ability to process it.

Albermarle

Linton said:

Albermarle said:

I think 'Loss Aversion'  plays a big part in many peoples view of money and life in general.
Loss aversion is the tendency to prefer avoiding losses to acquiring equivalent gains. 

It seems to me a perfectly rational tendency: iI you are broadly satisfied with your financial position acquiring £X more than you  need doesnt balance having £X less than you need in the happiness stakes.

In the circumstances that you describe you are right of course .
But this Loss Aversion tendency that most people have ,affects all kind of decision making , especially when it comes to money and often has a negative effect longer term .

Apodemus

Malthusian said:

On the subject of parallels between medical risk and investment risk...

Malthusian, the medical risk of side-effects from taking a medication are precisely known and well quantified, not only in the past but can be extrapolated accurately into the future in a way that simply doesn't apply to any economic indicators or the values of individual investments.

Eco_Miser

Apodemus said:

Malthusian said:

On the subject of parallels between medical risk and investment risk...

Malthusian, the medical risk of side-effects from taking a medication are precisely known and well quantified, not only in the past but can be extrapolated accurately into the future

I'm not sure that that's true, which is why some countries have put a hold on the AZ anti-COVID vaccination; but even if it was, potential users of a medication don't know if they are the one-in-a-million who will have the fatal side effect.

And so the crux of my question is, are those who truly believe in the principles above really actually taking a “risk” at all?

Yes, they're risking that their beliefs are wrong.

They're also risking that the timing and duration of an adverse market will exceed their ability to wait it out.

sevenhills

MaxiRobriguez said:

I've got a hockey mask I like to wear out at night to scare people with and I doubled down in March so the theory holds.

I bought Interserve, then bought again, so I tend not to do that now. I am still buying high-risk shares, the safe ones only increase in value slowly.

My i3 Energy have increased by 25% in 3 weeks, I may take my profit tomorrow, if they are still riding high.

thegentleway

One of my favourite games 🤣

Thrugelmir

thegentleway said:

One of my favourite games 🤣

One of my old favourite's was Mine A Million. 

chiang_mai

I've spent many hours trying to quantify the risks of my investment portfolio and I'm still not that much further ahead. I've looked at the issue from a Fund Risk Level (KIID) perspective, volatility, using Trustnet's relative risk gauge and also from a geographic and asset allocation perspective. I've tried to examine the percentage split between small/medium/large caps, sector risk, currency risk and maturity/duration risk.  Where I end up is feeling comfortable that I understand the risk associated with each individual holding and broadly overall. Yet what remains completely unquantified is market risk and the unknowns, arguably the biggest risk that exists today.

Thrugelmir

chiang_mai said:

I've spent many hours trying to quantify the risks of my investment portfolio and I'm still not that much further ahead. I've looked at the issue from a Fund Risk Level (KIID) perspective, volatility, using Trustnet's relative risk gauge and also from a geographic and asset allocation perspective. I've tried to examine the percentage split between small/medium/large caps, sector risk, currency risk and maturity/duration risk.  Where I end up is feeling comfortable that I understand the risk associated with each individual holding and broadly overall. Yet what remains completely unquantified is market risk and the unknowns, arguably the biggest risk that exists today.

Difficult to quantify the unknown. Your time would be spent thoroughly screening investments. 

chiang_mai

Thrugelmir said:

chiang_mai said:

I've spent many hours trying to quantify the risks of my investment portfolio and I'm still not that much further ahead. I've looked at the issue from a Fund Risk Level (KIID) perspective, volatility, using Trustnet's relative risk gauge and also from a geographic and asset allocation perspective. I've tried to examine the percentage split between small/medium/large caps, sector risk, currency risk and maturity/duration risk.  Where I end up is feeling comfortable that I understand the risk associated with each individual holding and broadly overall. Yet what remains completely unquantified is market risk and the unknowns, arguably the biggest risk that exists today.

Difficult to quantify the unknown. Your time would be spent thoroughly screening investments. 

Yes of course, but very few people are professional investors who understand all the intricacies and implications of fund analysis. And since global markets are so intertwined these days, the risk of market falls, velocity and contagion are extremely difficult to translate into risk and be corrrect.