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
- 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.
- Those with the knowledge and power to change the system;
- Those with knowledge and ability to manage their own financial affairs;
- 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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