You don’t understand risk.

I don’t mean you, in your professional capacity. I mean you, the human being whose brain is desperately trying to keep you alive. An endless procession of mortal threats are trying to end your particular genomic variation, forcing your brain to respond first and think later.

Your existence is threatened by hungry predators, roving bands of Neanderthals, poison mushrooms and all manner of germs.

What’s that you say? You don’t live on a savannah where lions hunt, and there haven’t been any Neanderthals for 30,000 years?

That is irrelevant to your risk-calculating engine. Your wetware was optimized during a period when those were the highest potential threats to your well-being. Humans who failed to avoid those didn’t manage to pass on their DNA, becoming someone else’s lunch.

Let’s look at some of the world’s top predators as an example of risk in the modern world. Continues here

Category: Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “You Don’t Understand Risk.”

  1. Conan says:

    As an Engineer I have studied PDCA and applied it to my work. However for the markets this is also a valuable analysis, for example:

    P= Plan – establish objectives – Are you investing for retirement? Income? other people? What is your time frame ( daily, weekly Monthly, forever?) What style or combination are you to use? fundamental? technical? dollar cost averaging? value ? etc.

    develop a process to deliver your results. Should do back testing on multiple markets and times to prove the process.

    D=Do implement the Plan collect data for analysis.

    C=Check Study the actual results (measured and collected in “DO” above) and compare against the expected results

    A=Act Take corrective actions on significant differences between actual and planned results. Analyze the differences to determine their root causes. Determine where to apply changes that will include improvement of the process

    Just food for though!

  2. bruder says:

    If you haven’t already read it I recommend “Thinking Fast and Slow” by Daniel Kahneman. He was awarded the nobel prize in economics for his work on behavioral economics. Kahneman methodically explains many human biases regarding risk taking. He also discusses and analyzes many other biases in decision making.


    ADMIN: May I suggest the following links:

    10 Behavioral Psychology Books for Investors
    Sketchnoting Thinking Fast & Slow (June 6th, 2012)
    Slow Down, You Think Too Fast (February 12th, 2012)
    Sitting Down with Dr. Daniel Kahneman (June 30th, 2013)

    • bruder says:

      Thank you. I am looking forward to watching the Khaneman’s interview with the Motley Fool.

  3. Robert M says:

    Two things, one is that their is a difference between uncertainty and risk. Hopefully this helps put them in perspective;
    Two, your example of human beings needs to be teased out a little. Direct deaths seems to be your aim. That unfortunately does little to explain the slow death of despair and fear foisted upon the middle class from purveyors of financial instruments that blew up the economy for the benefit of the rentier class.

  4. constantnormal says:

    For Darwinian evolution to be explored to its fullest, a distribution along the risk-tolerance spectrum helps, by allowing humans to identify the points of maximum bang for our risk-taking buck.

    I have observed that individuals each possess an innate “set-point” in their tolerance for risk (where “different” is a proxy for “risk”). Some of us are inherently foolhardy, others overly cautious. But when one set of values produces noticeably superior results, the herd moves in that direction, with greed overriding their fears, and when one extreme produces failures, the herd shies away.

    When you season the mix with liars and our tendency to see what we want to see, the model becomes very confusing, but when you look around at which species is exterminating all the others, it is a model that seems to be “working” thus far — but in the end, our inability to properly appreciate a working ecosystem may define the limits to the human modus operandi.