Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Changing Nature of Risk

By

We are in an era where we're redefining what a good risk to take is, and what the reward should be for taking it.

PrintPRINT
MINYANVILLE ORIGINAL A long time ago in a galaxy far, far away, somebody said something about a "repricing of risk." While that phrase was speaking specifically about mortgages and credit markets at that time, repricing risk is a never-ending endeavor. It doesn't just happen while we all watch flickers of green and red on our screens. It comes in a variety of shapes and sizes and can be taken or avoided both in a tangible as well as an intangible sense.

First, consider a risk/return pair: The odds of winning the lottery versus the odds that a start-up will be successful. Which opportunity has the more favorable risk/return profile? Well, the odds of winning a Powerball jackpot are one in 175 million. Said differently, your odds of failure are 99.99999943%. If you spent $10,000 dollars on Powerball tickets, the odds of failure – which can be thought of as the chance that all 10,000 tickets will fail to pay out – falls to 99.99429317%.

And still, people play the lottery yet shun starting a business. But why? You're practically guaranteed failure. The answer can be found in the perceived riskiness in each activity. As Jackie Summers said over at "The Good Men Project," when you play the lottery, "your investment – financially, emotionally, mentally – is minimal, the risk is negligible." So it's not that we focus on winning; we focus on trying to avoid loss. The guaranteed failure feels safer, so we pursue it. Strange, isn't it?

But here's a question: What if we redefined what the risk and reward were? The way Summers presented that risk/reward trade-off between playing the lottery and starting your own business is framed in a way that seems familiar: The risk/reward in playing the lottery is easy to understand. But who would want to start their own business, and take on that risk of failure? Your odds of starting a successful business have to be better than winning the lottery, but the investment is perceived to be riskier. For many, the act of starting a business boggles the mind.

Enter Generation Y. Nathan Norris wrote about the seismic shifts in preferences of the younger generations (born in 1982 and later) coming after the boomers. The reasons are varied of course, but at its core the changes are coming about as a direct reaction to many of the things older generations held sacrosanct. One of these differences can be seen in views on safety versus adventure. Here's a passage from Norris:
Generation Y has grown up in the safest environment in human history. The suburban cul-de-sac offered a safe place to play, with lower crime rates than cities. But despite this safe environment, the need to fill a 24-hour news cycle in the emerging world of cable and online communications brought every localized "stranger danger" news story to a national audience, giving rise to the overprotective Helicopter Mom who oversees every minute of her child's life. Whereas previous generations simply needed to come home before dark, Generation Y grew up with scheduled play dates and activities.

It should come as no surprise that this over-protected generation now celebrates dangerous and exciting activities like skydiving, rock climbing, and bungee jumping.

In short, they see the rush they get from extreme sports – sports that never would've existed four or five decades ago – as being worth the risk. This Red Bull ad captures the draw beautifully. The song "Outro" from M83 provides a great aural backdrop to the emotion the ad captures:



Up is the new down. What was once in is now on its way out. Where once the risk was deemed too great, it is now embraced. It's evident in everything from the desire to flock to urban cores because they can provide something that was missing in the walled gardens of suburbia (i.e. a place for human interaction) to younger folks starting their own businesses in the form of everything from garage-based tech companies to food trucks. The "safety" of working in a large, bureaucratic organization (big business and government are two examples that come to mind quickly) is no longer seen as safe, but as a doomed path to irrelevance and isolation. Coincidentally, the same view seems to be taking shape regarding the suburbs and the exurbs. They're not where you go to live, but where you go to die – in an isolated echo chamber, cut off from the rest of the world.

Lotteries themselves are a socionomic indicator. New Hampshire was the first state to sponsor what we know as the modern lottery, in 1964. It's deliciously ironic, because New Hampshire introduced their lottery at the end of a bull market. There are 43 states with lotteries now, and that increased use of lotteries seems to have coincided with the bull market.

But to go along with that sense of timing is the mindset of playing and winning the lottery. Money won is much sweeter than money earned, and for many folks, it was treated as such. As a corollary to Peter Atwater's "us, everywhere, forever" mindset, I'd add this question: What's the worst that can happen? Risk is an afterthought.

In extreme sports, you have to be cognizant of everything you do because, simply, you could die if you slip up. But the feeling, the experience you get, is indescribable. The risk and the return are there, plain for everyone to see. It's just that for many of us, it seems like the lens through which we view risk and return is shifting, is changing.

And maybe, just maybe, that isn't so bad.

Twitter: @japhychron
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE