A bias that leads to people taking the “sure path” over the “risky-yet-can-pay-off-big-time path.”
The reason? Risk can certainly pay off, but it might not. Playing it safe, however, can avoid the nasty things that no one likes, including stares of contempt from a spouse. Risk aversion causes us to stay in a job that we hate, rather than attempting to start a business where we’re the boss. The business may eventually pay off with fame and fortune, but it may not. The job we hate will at least provide a paycheck and keep the evil bill collectors off our backs.
Risk aversion has a flip side, like the Force. People tend to take increased risks to prevent loss.
Does this sound familiar? It somewhat becomes an escalation of commitment. It’s also indicative of people who need Gambler’s Anonymous. For example, a person who takes $500 to the casino and loses it all...may not want to go home empty-handed and tell the family that they can’t afford to go on vacation during Spring Break. As a result, he goes to the ATM, and takes out another $500 and plays with that…and loses, blowing next year’s Spring Break, too. Now he gets to go home and explain that the next two Spring Breaks will be spent watching reruns on Netflix, because he couldn’t stop gambling.
Point to remember: risk aversion can either be a fear of trying something that might seem crazy for a nice reward...or doing something crazy to avoid loss.
Related or Semi-related Video
Finance: What are Systematic and Unsyste...14 Views
finance a la shmoop what are systemic and unsystematic risk systemic risks are
just endemic to the market want to invest in the stock market and compound [Plate of vegetable appear]
return your way into great wealth great but then you'll suffer the normal risk
of the system that risk specifically is this yeah best of times worst of times
but up over time the market goes up you just have to embrace the notion that [Man hugging a tree]
there is systemic risk in that in the short run you can buy an S&P 500 index
fund here then lose like a third or whatever of your money in not too many
years but if you don't panic and sell just at the wrong time here right out
the storm and keep going well then you should be just fine by the time you
arrive here so that's risk that is always in the system equities rise and [Equity in the ocean]
fall like the tides or something like that but generally they rise and if you
want to swim in this bathtub well you get used to the turbulence and have an [Girl swimming against the tide]
airsick bag handy all right that systemic risk or systemic risk
what's unsystematic risk well it's bad investors or rather bad investing it's
panicking and selling your stock just when you should be doubling down its
buying lousy companies thinking that they're cheap today but not realizing [Woman runs away from smelly girl]
that they will always be cheap because they're lousy or in a lousy industry or
run by lousy management it's buying into lousy industries that also look cheap
but are dying hello paper and pulp is yeah anyone really think that's gonna be [Paper printing]
around in 20 years all right well it's believing the dreamy hopes and prayers
of future earnings and trusting that there really will be 5 million [Traffic on the highway]
driverless cars on the road in 3 years you know good luck with that we'd love
it to be true but ain't gonna be unsystematic risk is also investing in
bonds for the long-term taking very little risk when taking little risk is
the opposite of what you should be doing when you're a young investor so yeah
systematic and unsystematic risk both exist plentifully and both can bite you [Dog bites portfolio from woman]
right in the portfolio so you got to know what both are and embrace them
for what they're worth
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