We all have a sense of what risk is, alongside our notions of whether it’s good or bad, and how to deal with it. We’ve also seen the intersection of risk and money, but let’s dig a bit deeper, for risk and money dance a strange dance together.
First let’s meet our fictional friends as per usual.
There’s breaking news all over town - someone from a neighboring land has devised a new type of hybrid grain seed which is said to yield a much better crop - quicker and with less effort needed.
Steve and Bryan are chatting about it, but of course it’s a risk. While they’re both enthusiastic -- and that merchant from the neighboring land is offering an initial seed batch for a big discount. They’re both keen to try it out, because what if it’s really true.
And as they’re chatting, with Brenda and Irene listening in, Steve is like, well Bryan, you had a great harvest last season, but mine was a disaster, the weather gods weren’t so kind to the particular crop I was growing.
Irene chips in, yes, it’s a dilemma, you can’t stick to that crop given that disaster, but can you safely try out the new one instead? There’s a long pause.
And then Brenda is like, listen, Bryan has a good stock of grain from the previous harvest. Why don’t you both go ahead with trying out the new grain, but if the harvest fails, so Bryan say you commit to helping Steve out with 10 sacks of grain from your store should it fail.
Bryan’s like, wait, just like that? Irene replies, no no, let’s say Steve hands over 3 of his cows for Bryan to hold on to until harvest time.
Bruno the dog and Iris the cat looking up in disdain as if going, pah we both do such stuff all the time with our bones and mice!
The Wings of Chance
Right ok, these days, most of us may not have harvests and cows to worry about ourselves, but it’s safe to say that we’ve gone through such emotions and dilemmas in our day-to-day decision making. But as I said, let’s dig deeper.
Back in TecC 33C1 I discussed some of the very fundamental questions of life, in particular around being and becoming and how philosophers have grappled with these questions over centuries. On the question of being, specifically, there is a word we used: ‘contingent’.
We don’t tend to use that word often, but here’s the thing: everything that happens is contingent, in other words, it may or may not happen. It depends on a myriad other prior events to go one way or the other. (a modern treatment of this of course is the butterfly effect.) So we may say, outside of controlled setups, pretty much everything is largely unpredictable.
So here’s a simple definition of risk: the chance that something might not turn out as we desire.
This applies both to natural phenomena but especially to outcomes that proceed from decisions we have made.
At the Crossroads
So yes, some of us may have this notion that risk is ‘bad’, we may chide someone for taking risks. But, like I said, it’s not about good or bad, but about undesirable, because every single act of ours, is a decision -- you cross the street here or further there -- and thus carries risk, however big or small. (Imagine for a moment a Greek god, let’s say named ‘Rhyskos’, up there, Stinging, I mean singing: every breath you take, every move you make... I’ll be watching you..)
But, while we cannot eliminate risk, we can manage it, in particular we can transfer risk, because as we saw in the fictional story, different people have different risk appetites. It may not be simply because of one’s circumstances as in that case, but it could be one’s own nature, some people are more willing to take risks, which to others might seem reckless.
And then there is the whole thing about ‘high risk high reward’. Some of us are willing to take more risks because we want a bigger reward: call it ambitious or greedy, but it’s human nature.
Show me the Money!
I’ve come this far and haven’t even mentioned ‘money’? Well, again, I hope I’ve demonstrated that money is the measure of risk, when it comes to managing, and transferring it between parties. And this is at the very heart of a great many, mostly highly misunderstood, activities in the banking industry, some simple some rather more complex: statistics, insurance, investment banking (derivatives such as futures, options etc)
Daunting as some of those terms may sound, and I’ll come back to undaunt them for you in due course, the fundamental principle is the same. It’s a tradeoff (and often literally a trade) between risk and security.
So we cannot avoid risk, but we can learn to manage it, to take on more for higher reward, or to offload some for greater security and certainty but at a cost. And hopefully these discussions offer a new dimension, another frame of reference, a new paradigm on your decision making, whether it’s choosing a career path, buying a house or just crossing the street..
Article written by Ash Stuart
Images, videos, voice narration and some footnotes generated by AI
Nothing in this presentation constitutes as advice - financial, investment or other
Further Reading & Reference
* TecC 33C1 - The Golden Crescendo: The Very Architect of Existence
