Is risk a fate or a choice?. Jon Danielsson.

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.

EventImportanceFate or choice
Asteroid destroying earthMost extremeFate
Nuclear war destroying all assetsMost extremeFate, unless mad dictator
Confiscation of all private assetsVery extremeFate for almost all
Loosing pensionExtremeFate usually
War destroying most assetsVery extremeFate for almost all
1929 style depressionVery extremeFate unless politician/regulator/financier
Major financial and economic recessionExtremeFate unless politician/regulator/financier
2008 style crisisModerately badFate unless politician/regulator/financier
Banking crisisModerately badFate unless politician/regulator/financier
CDSNot importantFate for most
Value-at-riskNot importantFate for most
VolatilityNot importantFate 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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