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.
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.
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.
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.
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?
emacknight:
Can you answer this question from earlier?
This just has to be posted here: http://i.imgur.com/gdvaL.jpg
Yes, it’s the same risk. $1000 is equivalent to $1000.
To make sure, I even double-checked it…
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.
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. . .
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.
These don’t look like the same “investments” to me.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
