# Understanding Risk **URL:** \ **Category:** Great Debates\ **Created:** [March 28, 2011, 8:06pm UTC](https://boards.straightdope.com/t/understanding-risk/576302 "2011-03-28T20:06:25Z")\ **Posts on this page:** 20\ **Page:** 9
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [March 30, 2011, 10:32am UTC](https://boards.straightdope.com/t/understanding-risk/576302/161 "2011-03-30T10:32:13Z")
> [@Whack-a-Mole](#): > > Few people on Main Street manage their own portfolios. Their investments are in 401Ks or their money are in pension funds. None of which they control except in a broad sense (if that). > > Want cites of old people who had their retirement money wiped out? > > How much money did the head of Goldman Sachs lose? Prior to the crash the Dow reached record highs. During that time lots of old people were happy to cash in their 401(k)s. Do you have any cites of people willingly giving it back? Suggesting that perhaps they shouldn’t have it? They could have kept their money in a sock but instead enjoyed the percieved gains they made in the stock market. And each and every one of them were required to sign disclaimers about the risks involved with the stock market. ---
**Author:** ![Gyrate](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gyrate/32/3588_2.png) [@Gyrate](https://boards.straightdope.com/u/Gyrate)\ **Post date:** [March 30, 2011, 11:27am UTC](https://boards.straightdope.com/t/understanding-risk/576302/162 "2011-03-30T11:27:17Z")
> [@emacknight](#): > > Prior to the crash the Dow reached record highs. During that time lots of old people were happy to cash in their 401(k)s. Do you have any cites of people willingly giving it back? Suggesting that perhaps they shouldn’t have it? > > They could have kept their money in a sock but instead enjoyed the percieved gains they made in the stock market. And each and every one of them were required to sign disclaimers about the risks involved with the stock market. The first investors in a pyramid scheme often see high returns. Is that an endorsement of the system? Should later investors have “just known better”? You seem to base much of your arguments on a perfect understanding of the risks involved by all parties, using examples where risks were either _not_ perfectly understood by some of the risk-takers or were actively misrepresented by those seeking to offload the risks onto others. CDOs were being sold as sound investments. It’s all very well in hindsight to say that people should have known better, but your average layman pays financial advisors for the benefit of their expertise and the experts were either duped themselves or happily selling brass for gold in order to get their commissions. The laymen got screwed simply for being laymen. ---
**Author:** ![Evil\_Captor](https://avatars.discourse-cdn.com/v4/letter/e/f17d59/32.png) [@Evil\_Captor](https://boards.straightdope.com/u/Evil_Captor)\ **Post date:** [March 30, 2011, 12:12pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/163 "2011-03-30T12:12:19Z")
> [@emacknight](#): > > Holy fuck dude, there isn’t a message board big enough in the world for that chip on your shoulder. You obviously have your dogma that I’m not about to sway. > > But perhaps, just perhaps, you’ll consider the 8 years running up to the collapse. If you did, you might notice that a damn lot of people on Main St (yes, I said it) made bundles of cash. People were happy to sell their run down 1920’s 1.5 story for $300,000. People were also happy to buy that piece of shit and flip it for $350,000 buy taking out the carpet. > > There are always going to be people that game the system. Eventually someone learns out to count cards or load dice. Society took a massive risk in the run up to the financial collapse, because they loved having the Dow at record highs and unemployment at record lows. People loved being able to buy a house with no money down and a ridiculously low interest rate. And loved cashing in their 401K. All those people on Wall St you so love to demonize didn’t act alone. People didn’t have to use those shitty mortgages, then take out home equity loans, and then take out pay day advances. They weren’t forced, they did so freely, but unfortunately without having any understanding of the risk involved. you’re barking up the wrong tree. First of all, when some citizen buys into a bad investment, who’s more at fault, the citizen or the con man posing as a finance industry professional that sold it to her? C’mon, think hard … Second, it was not the bad mortgages that sank the economy, it was the derivatives gambling that was associated with it, as it increased the risk by orders of magnitude. We could have much more easily adjusted to the mortgage crisis without the derivatives. Probably without a recession. THAT was ALL Wall Street, baby. Yes, it really was ALL their fault. I am surprised I had to tell you that. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [March 30, 2011, 12:15pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/164 "2011-03-30T12:15:12Z")
> [@emacknight](#): > > People didn’t have to use those shitty mortgages, then take out home equity loans, and then take out pay day advances. They weren’t forced, they did so freely, but unfortunately without having any understanding of the risk involved. Are you advocating _caveat emptor_, and arguing that smart financiers deceiving naive citizens is a good thing? **emacknight** , I can’t figure you out. Sometimes you seem rather intelligent. Sometimes your posts are so misguided I think you’re playing the facetious troll. In prior threads I remember thinking “He’s not serious.” I’m beginning to think I gave you too much credit earlier. In future, if you are being facetious, please throw in a smiley or smirky icon to help us out. ---
**Author:** ![Sandwich](https://avatars.discourse-cdn.com/v4/letter/s/22d042/32.png) [@Sandwich](https://boards.straightdope.com/u/Sandwich)\ **Post date:** [March 30, 2011, 12:31pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/165 "2011-03-30T12:31:05Z")
> [@Evil\_Captor](#): > > you’re barking up the wrong tree. First of all, when some citizen buys into a bad investment, who’s more at fault, the citizen or the con man posing as a finance industry professional that sold it to her? C’mon, think hard … Oh, oh, me, me, this is easy. The con man is at fault. So, once we have optimised our legal and financial system to minimise crime, is capitalism the best economic system? Or, in the terms of this debate, should… … … wait, what is the debate? Is it, owners must (or must not?) enter into employment contracts with their staff which involve profit sharing? If so, the answer is that in general they should be left to themselves to come up with whatever arrangement is most mutually satisfactory. If a dishwasher / star investment banker has agreed to work for minimum wage, then that is what they are entitled to. The owner of a successful business might pay a discretionary bonus if it’s in his interest to do so. If a dishwasher / star investment banker has a contract with an expectation of a bonus then that’s fine too. So resolved: good capitalists never pay star investment bankers anything but a fixed low wage, and good socialists believe that investment bankers are entitled to a big slice of exceptional profits whenever they are made. Or vice versa. Or something. ---
**Author:** ![Gyrate](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gyrate/32/3588_2.png) [@Gyrate](https://boards.straightdope.com/u/Gyrate)\ **Post date:** [March 30, 2011, 12:47pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/166 "2011-03-30T12:47:40Z")
> [@Sandwich](#): > > wait, what is the debate? Good question. We seem to have several going on simultaneously and they’re starting to interbreed. Legal, moral and financial risks and obligations, theoretical vs real-world scenarios…it’s going to take some unpicking. In the meantime I’ve got this startup company which manufactures motorized goalposts. I figure it’ll do booming business around here. Anyone care to invest? ---
**Author:** ![carm](https://avatars.discourse-cdn.com/v4/letter/c/c2a13f/32.png) [@carm](https://boards.straightdope.com/u/carm)\ **Post date:** [March 30, 2011, 3:00pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/167 "2011-03-30T15:00:24Z")
**emacknight:** Can you answer this question from earlier? > [@](#): > > Third, if you could clarify this, mentioned earlier by septimus: > > > [@](#): > > > > OP has made it clear that he thinks a millionaire risking $500 risks more than a dishwasher with $400 to his name who risks all he has. > > Is this your position? If Bill Gates invests $1000 in a startup, and Joe Nocash invests his life savings of $1000 in the same business, are they both taking on the same amount of risk? ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [March 30, 2011, 5:56pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/168 "2011-03-30T17:56:27Z")
This just has to be posted here: [http://i.imgur.com/gdvaL.jpg](http://i.imgur.com/gdvaL.jpg) ---
**Author:** ![Ruminator](https://avatars.discourse-cdn.com/v4/letter/r/b9bd4f/32.png) [@Ruminator](https://boards.straightdope.com/u/Ruminator)\ **Post date:** [March 30, 2011, 6:04pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/169 "2011-03-30T18:04:08Z")
> [@carm](#): > > **emacknight:** > Can you answer this question from earlier? > > > [@](#): > > > > Is this your position? If Bill Gates invests $1000 in a startup, and Joe Nocash invests his life savings of $1000 in the same business, are they both taking on the same amount of risk? Yes, it’s the same risk. $1000 is equivalent to $1000. To make sure, I even double-checked it… > **[$1000 = $1000 ? - Wolfram|Alpha](https://www.wolframalpha.com/input/?i=%241000%2B%3D%2B%241000%2B%3F)** > > Wolfram|Alpha brings expert-level knowledge and capabilities to the broadest possible range of people—spanning all professions and education levels. It’s up to you to prove otherwise. Risk is measured by the particular dollar amount and the particular point-in-time it was committed. It’s unfortunate people must complicate the situation beyond the dollar amounts by factoring all sorts of life situations. That’s pointless because we’re already all different that way. An investor with an extra $1 million in a reserve Swiss bank account is different from a person who has lost both parents who is also different from a person that knows he will die from cancer in 1 year and is also different from a person that is abandoning materialism and using his investments for zen living in Africa. Factoring all those things is irrelevant…and stupid. ---
**Author:** ![carm](https://avatars.discourse-cdn.com/v4/letter/c/c2a13f/32.png) [@carm](https://boards.straightdope.com/u/carm)\ **Post date:** [March 30, 2011, 6:11pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/170 "2011-03-30T18:11:41Z")
So, **Ruminator,** how about this one: Person A bets his friend $10 on a coin toss. Person B bets his friend $10 he can jump out of a plane 10,000 feet in the air, with no parachute, without hurting himself. I presume you also think these two people are taking on the same level of risk? If so, I have a little bet for you. . . ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [March 30, 2011, 6:15pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/171 "2011-03-30T18:15:14Z")
> [@Ruminator](#): > > Yes, it’s the same risk. $1000 is equivalent to $1000. And herein lies the problem. Yes, without doubt $1000 = $1000. What is completely missing from that analysis is whether you are starting with $1,000,000 or $1,000. “Risk” must be applied at the individual level. Your risk and my risk _are not_ the same even if the stakes are identical. To you the stakes may be comical, to me they may mean my whole livelihood. ---
**Author:** ![Ruminator](https://avatars.discourse-cdn.com/v4/letter/r/b9bd4f/32.png) [@Ruminator](https://boards.straightdope.com/u/Ruminator)\ **Post date:** [March 30, 2011, 6:17pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/172 "2011-03-30T18:17:20Z")
> [@carm](#): > > Person A bets his friend $10 on a coin toss. > Person B bets his friend $10 he can jump out of a plane 10,000 feet in the air, with no parachute, without hurting himself. > > I presume you also think these two people are taking on the same level of risk? These don’t look like the **same** “investments” to me. ---
**Author:** ![Ruminator](https://avatars.discourse-cdn.com/v4/letter/r/b9bd4f/32.png) [@Ruminator](https://boards.straightdope.com/u/Ruminator)\ **Post date:** [March 30, 2011, 6:26pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/173 "2011-03-30T18:26:26Z")
> [@Whack-a-Mole](#): > > “Risk” must be applied at the individual level. Your risk and my risk _are not_ the same even if the stakes are identical. To you the stakes may be comical, to me they may mean my whole livelihood. It’s irrelevant. Two people arrive at a supermarket to buy a can of soup. It doesn’t matter if Person A strolls 2 blocks from his house while person B struggled through rain, sleet, snow fighting dragons to get there. It doesn’t matter if Person A is feeding himself while Person B is feeding his dying infant. The price of the can of the soup is the same to both. _It has to be the same._ I can only imagine the idiocy of every toll booth being backed up for miles because everybody has some sob story about their life so the cashier can try to determine a “fair” price for each driver. It’s ridiculous and irrelevant. Every business has a price for investment and a point-in-time to invest it to realize certain returns. It is what it is. That’s what “investment risk” is all about. Several posters certainly want to ADD to that definition but it’s irrelevant and to prove that it’s pointless, try approaching any business startup with a woe-is-me sob story and see if they will trade their equity for it. I don’t think they will. They’d rather have that $1000 – Bill Gates’ $1000 or your last $1000, they don’t care. ---
**Author:** ![carm](https://avatars.discourse-cdn.com/v4/letter/c/c2a13f/32.png) [@carm](https://boards.straightdope.com/u/carm)\ **Post date:** [March 30, 2011, 6:27pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/174 "2011-03-30T18:27:30Z")
You’re avoiding the question. They have both invested $10. So, according to your logic, they have the same level of risk, yes? Since we can’t account for non-monetary factors, after all. ---
**Author:** ![Algher](https://avatars.discourse-cdn.com/v4/letter/a/3d9bf3/32.png) [@Algher](https://boards.straightdope.com/u/Algher)\ **Post date:** [March 30, 2011, 6:29pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/175 "2011-03-30T18:29:27Z")
> [@carm](#): > > So, **Ruminator,** how about this one: > > Person A bets his friend $10 on a coin toss. > Person B bets his friend $10 he can jump out of a plane 10,000 feet in the air, with no parachute, without hurting himself. > > I presume you also think these two people are taking on the same level of risk? > If so, I have a little bet for you. . . The amount risked is the same. The investment risk is vastly different. I would hope for a much better potential return for our skydiver to compensate for the very low potential payout. ---
**Author:** ![carm](https://avatars.discourse-cdn.com/v4/letter/c/c2a13f/32.png) [@carm](https://boards.straightdope.com/u/carm)\ **Post date:** [March 30, 2011, 6:29pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/176 "2011-03-30T18:29:52Z")
> [@Ruminator](#): > > It’s irrelevant. > snip > > Every business has a price for investment and a point-in-time to invest it to realize certain returns. It is what it is. \*\*\* That’s what “investment risk” is all about.\*\*\* Several posters certainly want to ADD to that definition but it’s irrelevant and to prove that it’s pointless, try approaching any business startup with a woe-is-me sob story and see if they will trade their equity for it. I don’t think they will. They’d rather have that $1000 – Bill Gates’ $1000 or your last $1000, they don’t care. My emphasis. If this thread had been called: “Understanding Investment Risk”, we wouldn’t be having this conversation. We aren’t trying to add to the definition of risk. You guys are trying to limit its definition to _just_ money invested. ---
**Author:** ![elbows](https://avatars.discourse-cdn.com/v4/letter/e/b3f665/32.png) [@elbows](https://boards.straightdope.com/u/elbows)\ **Post date:** [March 30, 2011, 6:38pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/177 "2011-03-30T18:38:58Z")
I don’t see anything in the OP to debate, there is no question or statement of what you want to debate. That said, I’m going to guess you never worked in a restaurant as your OP has some glaring errors in it. > [@](#): > > If customers don’t show up, the waitress won’t be paid Say what now? Sorry to inform you that’s not how it works in the real world. You show up, put in hours, you get paid your wage, customers or not! If not call the labour board that’s a huge violation. > [@](#): > > He doesn’t get to improve his skills and thus his income. Again, I hate to tell you this but tons of restaurants get a dishwasher who is a hard worker and presentable and soon he’s picking up shifts as a bar back, or busing tables. A year later he’s waiting tables. Waiters become Matre d’s, then managers. Or, at least in the real world. Everyone in the restaurant is sharing in the risk the owner takes, because their livelyhoods are on the line. Restaurants fail all the time, and not because the employees aren’t doing their jobs. Because the owner is drinking up the profits with his mates, doing blow, breaking liquor laws or any other of a thousand things. It has also become custom for restaurants to skim money off the servers, for no other reason than they can get away with it. Sometimes it’s redistributed to the kitchen staff but, often, it goes right into the owners pocket and isn’t even declared or taxed. How does that mesh with your scenario? Restaurants are nothing but risk. And everyone working there understands that the risk is spread between them all, perhaps not equally, but they are all taking a risk. Restaurant employees routinely lose jobs, not because they aren’t skilled, but because the owner/manager gets a bug up their ass over some nonsense or other unrelated to their ability to do their job. I don’t think a restaurant was a very good example for promoting your agenda, you should consider something better. ---
**Author:** ![Paranoid\_Randroid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/paranoid_randroid/32/18_2.png) [@Paranoid\_Randroid](https://boards.straightdope.com/u/Paranoid_Randroid)\ **Post date:** [March 30, 2011, 6:39pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/178 "2011-03-30T18:39:13Z")
> [@Ruminator](#): > > Risk is measured by the particular dollar amount and the particular point-in-time it was committed. It’s unfortunate people must complicate the situation beyond the dollar amounts by factoring all sorts of life situations. I should point out that there is no single definition of “risk”. We expect that those who undertake more risk receive more reward because we are generally risk averse; in principle a risk loving restauranteur—he loves gambling on new restaurants—would be willing to let his employees share in the more reward so that the stakes are higher. This sounds absurd (and it is). But I think it’s important to highlight that we can’t talk about just _risk_, in relation to reward, without taking into account risk aversion. Because attitudes toward risk differ depending on wealth, it is very much apropos to surmise that Joe the Dishwasher investing $500 takes on more risk than Bill Gates investing $500. Surely he is at least doing so in relative terms. This isn’t to claim that anyone “deserves” a greater share of profit, of course. ---
**Author:** ![Ruminator](https://avatars.discourse-cdn.com/v4/letter/r/b9bd4f/32.png) [@Ruminator](https://boards.straightdope.com/u/Ruminator)\ **Post date:** [March 30, 2011, 6:43pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/179 "2011-03-30T18:43:50Z")
> [@carm](#): > > You’re avoiding the question. > > They have both invested $10. > > So, according to your logic, they have the same level of risk, yes? Since we can’t account for non-monetary factors, after all. You seem to have some fundamental issues with category theory. I’m not avoiding the question. The question makes no sense unless we’re talking the same investment and rewards. We can certainly account for non-monetary factors. We do it all the time. A father will lend money to his son and zero interest. A philanthropist will donate his paintings to a museum. Money isn’t everything. It’s normal. But all that has nothing to do with the standard terminology of “investment risk.” It’s a monetary perspective yes, but that’s how it’s used in the typical literature. > [@](#): > > You guys are trying to limit its definition to just money invested. Well, that’s what it **is** … the standard definition _must_ be understood that way (_even if you don’t agree with it_) so various related postings don’t get derailed with semantic nitpicking. But you don’t have to just argue with posters here about the definition. Take that wider expanded definition that you prefer to use out into the real world and see who agrees with you. There are thousands of business startups right now that need investments. Take “_ **carm** ’s philosophical all-encompassing version of investment risk_” to them and ask them to trade their equity for your particular life circumstances instead of $1000. See if any agree with you. ---
**Author:** ![Paranoid\_Randroid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/paranoid_randroid/32/18_2.png) [@Paranoid\_Randroid](https://boards.straightdope.com/u/Paranoid_Randroid)\ **Post date:** [March 30, 2011, 6:46pm UTC](https://boards.straightdope.com/t/understanding-risk/576302/180 "2011-03-30T18:46:21Z")
> [@Ruminator](#): > > Two people arrive at a supermarket to buy a can of soup. It doesn’t matter if Person A strolls 2 blocks from his house while person B struggled through rain, sleet, snow fighting dragons to get there. It doesn’t matter if Person A is feeding himself while Person B is feeding his dying infant. The price of the can of the soup is the same to both. _It has to be the same._ While I agree that prices couldn’t possibly—and shouldn’t—be set according to what the buyer “deserves”, there is nothing unreasonable about charging different prices to different persons. This is called price discrimination and it happens all the time. If you can discern individuals who underwent difficult travel to get to the store, and believe that they are willing to pay less (or more) than those who walked a half a block, there would be nothing ludicrous about a “Travel Hardy” discount or something. [Previous page](https://boards.straightdope.com/t/understanding-risk/576302.md?page=8) [Next page](https://boards.straightdope.com/t/understanding-risk/576302.md?page=10)