Tag Archives: insurance

Jun 27 2013

On a scale of 1 to 10…

Risk

Risk (Photo credit: avyfain)

If you ever want investment advice – especially if you reside in the UK, an advisor will ask you to fill in a survey all about risk. I understand why these surveys exist, after all, the advisor needs to make sure you understand the concept of risk versus reward and pitch investment advice to you that is appropriate to how you feel.

By necessity, the survey is relatively simple consisting of statements like “Compared to the average person, I would say I take more risks” and you then tick a box to show how strongly you agree or disagree with the statement.

But who’s the average person and what do you consider a risk? I wouldn’t try anything like skydiving and I’m not too keen on the idea of deep-sea diving, but I do recognise that any kind of reward comes with risk. There’s even a risk of doing nothing because depending on your situation, the lack of action could leave you considerably worse off. If you’re standing in a burning building, you probably take a different view on the risk of jumping out the window.

I find such forms very difficult to fill in because my answers to the questions can vary wildly depending on which aspect of my life you are talking about. I have a very different attitude to the risk I take when I buy a £2 lottery ticket compared with one of those £50 tickets at the airport to win a car. It depends on so many factors; the amount of outlay, the potential reward and the likelihood of winning (or as is more often the case – losing).

When it comes to investment, it’s even more complicated. My attitude to risk changes with timescale, so I have a different attitude about the investment that’s supposed to pay off my mortgage compared to my retirement fund. The age at which you can retire in this country is galloping over the horizon so I’m fairly relaxed about taking some risk because a lot can happen between now and then.

It also depends on where in the world you are talking about. We have people in the western world doing essentially the same job as their counterparts a few thousand miles to the East, but we earn orders of magnitude more money. There is a considerable rebalancing that’s going to play out over the coming years which will affect the likelihood of growth in each area. Asser class makes a difference too. We have a saying “safe as houses.” I imagine many people across Europe and America take a very different view about the relative risks of investing in housing since the sub prime market imploded five or six years ago.

And it interest rates start going up or America decides that what the world really needs is another war – it will all change again. Maybe I’ll fill out 10 different forms.

Related articles
Advertisement
Aug 30 2012

The wisdom of crowds

NXNEi - Day 2 - Kickstarter.com

NXNEi – Day 2 – Kickstarter.com (Photo credit: Jason Hargrove)

The idea of a collection of people chipping in to raise enough money to make something happen is not a new one. Charities have relied on the concept for years, as have mutuals or building societies. The earliest documented such endeavour is Ketley’s Building Society which grew out of the inns, taverns and coffeehouses of 18th century Birmingham.

The funds in that case were for building houses, but similar societies cropped up to pay out money in the case of misfortune such as bereavement or loss of limbs at sea. The members paid a small subscription hoping against hope that they would never need of the society’s services. Many famous modern insurance companies can trace their roots back to such humble origins.

Mention crowd funding to most people and they will not think of charities, building societies or insurance companies. They will immediately think of crowd funding websites. Just as Amazon and eBay have revolutionised selling over the internet, so have kickstarter.com and indiegogo.com have taken crowd funding to a whole new level.

By combining the reach of the internet with the viral effect of social media, crowd funding websites are ruthlessly efficient funding models. If your target audience likes your pitch, you will probably get funded. If your target audience looks at your pitch and gives a collective “meh!” then your funding deadline will pass with nary a whimper. Successful projects tend to snowball as stretch goals are reached adding more and more swag to the booty on offer.

I recently took part in funding this kick-starter project which went on to become the third most successful ever. It is fast becoming a poster child for the kind of innovation that crowd funding can unlock for successful pitchers. In this particular case, the pitch was for plastic miniatures (used for war-games or table top games). The original funding target for this project was $30k. They went on to raise about $3.5m

The upfront costs in making tooling for plastic miniatures is ruinously expensive. The ongoing unit costs per miniature are very low. Funded traditionally, it makes for a risky business because you never know how many units you will sell and whether you will cover your initial outlay. Crowd funding is perfect because if there is no interest for your product, you find out without spending a fortune. If you are lucky, you will end up with a runaway success.

I believe that crowd funding could offer a much more efficient mechanism for companies to build the right products. Using the same kind of mechanism, product managers could design pitches for new products. Salesmen (or maybe even customers) could commit to delivering a certain sales target. If the project reaches the profitability target, it gets funded.

There is even scope for the project to work in reverse with the consumers designing the pitch and when enough people say “I’d like one too” – a company takes up the mission of delivering the product.

Related articles