Tag Archives: Risk

Jan 27 2014

Danger danger!

Dangerous Risk Adrenaline Suicide by Fear of F...

Dangerous Risk Adrenaline Suicide by Fear of Falling (Photo credit: epSos.de)

There once was a monastery in perched high on a cliff several hundred feet in the air. The only way to reach the monastery was to be suspended in a basket which was pulled to the top by several monks who pulled and tugged with all their strength. Obviously the ride up the steep cliff in that basket was terrifying. One tourist got exceedingly nervous about half-way up as he noticed that the rope by which he was suspended was old and frayed.

With a trembling voice he asked the monk who was riding with him in the basket how often they changed the rope. The monk thought for a moment and answered brusquely, “Whenever it breaks.”

Being scared of heights, I’m not sure I would get in that basket, even if the rope was brand new and 6 inches thick. No-one in their right mind would get into that basket if there was visible wear and tear on the rope. It would be a good idea to inspect the rope regularly and replace it at the first sign of damage. For the really paranoid, you might even replace it every so often with a new rope just in case.

But when it comes to the world of software, it’s a little bit different. People are very risk averse. Even if the software they are running has a known serious defect, they sometimes perceive the risk of taking a fix to be higher than living with the status quo. So let me get this straight, in software terms, you are dangling in a basket hundreds of feet up suspended by a dangerously frayed rope. I’m offering to fit you a new rope, but you don’t want to take it in case there’s a manufacturing defect. Or maybe it might cause a problem with the basket. Why did you even report the problem if you don’t want to take a fix?

It’s not a fair analogy because software is much more complex than a simple basket suspended by a rope. There are many interdependencies. But even so, the risk of doing something always needs to be compared with the risk of doing nothing.  Yes, something might go wrong, but you are in a situation where something is absolutely definitely wrong right now and causing you lots of pain.

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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.

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