Is risk a fate or a choice?

December 15, 2022

The prevailing view seems to be that financial risk is a fate not a choice. Even ChatGPT thinks so. As we manage our financial affairs, we are in control. Risk is a choice. True?

Fate — noun

1. the development of events outside a person's control.

I asked ChatGPT, and it told me: "Financial risk is not a fate, but rather a choice."

Then it all depends on what risk is. Here are some scenarios.

Event	Importance	Fate or choice
Asteroid destroying earth	Most extreme	Fate
Nuclear war destroying all assets	Most extreme	Fate, unless mad dictator
Confiscation of all private assets	Very extreme	Fate for almost all
Loosing pension	Extreme	Fate usually
War destroying most assets	Very extreme	Fate for almost all
1929 style depression	Very extreme	Fate unless politician/regulator/financier
Major financial and economic recession	Extreme	Fate unless politician/regulator/financier
2008 style crisis	Moderately bad	Fate unless politician/regulator/financier
Banking crisis	Moderately bad	Fate unless politician/regulator/financier
CDS	Not important	Fate for most
Value-at-risk	Not important	Fate for most
Volatility	Not important	Fate for most

Like always, the answer is "It depends". At the risk of oversimplification, there are three types of people this applies to.

1. Those with the knowledge and power to change the system;
2. Those with knowledge and ability to manage their own financial affairs;
3. The rest.

And the the rest is by far the largest group. An OECD study found that 40% of the population does not understand diversification, and only 27% are able to both calculate simple interest and recognise the added benefit of compounding over five years. Even for the 40% I surmise only a small fraction is familiar with the intricacies of risk management and asset selection.

OECD (2017), G20/OECD INFE report on adult financial literacy in G20 countries.

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