Five ways we can better take and manage risk.
Topics covered include:
- How likely is it that China will invade Taiwan and the stock market will fall 80%
- Why experts tend to be humble and don’t make specific predictions
- What is the difference between risk and uncertainty, and between loss capacity and loss aversion
- What factors impact our degree of loss aversion and loss tolerance
- Why the economy needs more risk takers rather than rentiers
Show Notes
Investor Risk Profiling: An Overview by Joachim Klement, CFA—CFA Institute Research Foundation
The Global Impacts of Climate Change on Risk Preferences by Wesley Howden and Remy Levin
Venture Capital AUM at Record High of $2tn—Preqin
10 Key Facts About the Capital Markets by Katie Kolchin, CFA—SIFMA
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode—394. It’s titled “How to Get Better at Risk-Taking.”
I recently received an email from a listener. She writes, “I appreciate your knowledge and sharing what you know. I’m a Plus member and I’m hoping you can ease some of my concerns. I’ve been getting a ton of the “Market is going to crash” emails, several mentioning China taking over Taiwan. Market drop predictions of 80%. I know you can’t read the future, but I’m wondering if there is anything you can tell me that might help calm my panic.”
In today’s episode, we’re going to take a look at risk-taking, risk aversion, loss aversion, and how to better manage risk and be willing to take risk.
We’ll look at some of her specific concerns with China and 80% drops, but also step back a little bit and look at some principles for how we can be better at managing risk and taking risk.
China and Taiwan
First, no one knows whether the stock market will fall 80% or not, or if China will invade Taiwan. Only their senior leadership knows that. And maybe they don’t even know if and when they will do that. Now, there are some things that we can look at in the case of China potentially invading Taiwan that suggests it’s unlikely in the near term.
I was first exposed to Taiwan in the sixth grade. We did lengthy reports on different countries, and for whatever reason I chose Taiwan; probably not the best country to choose, because their history was very confusing, at least to me as a sixth grader, with the Republic of China led by Chiang Kai-shek fighting the Chinese Communist Party, and Chiang Kai-shek having taken the Republic of China into Taiwan, and there’s been this dispute ever since the ’40s.
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