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e) I will not invest under any circumstances or unless there is an absolute commitment to getting my money back What people answered: a) 1% b) 2% c) 12% d) 36% e) 48% Decision point 1 is designed to illustrate the significant variations in our personal attitudes to risk our propensity to accept risk. Decision point Two: There are now two days to go before the offer closes. You learn that it is significantly oversubscribed and many people decided to invest more than the minimum amount. This does not affect your ability to invest nor does it change the rate of forecast return. You know some of those who have decided to offer a higher investment are respected and seasoned business people. Based on this new information, confirm the level of past success you require to make this investment: a) Less than 50% of past ventures have been successful b) Between 50% and 65% have been successful c) Between 65% and 80% have been successful d) More than 80% have been successful e) I will not invest under any circumstances or unless there is an absolute commitment to getting my money back What people answered: a) 1% b) 5% c) 19% d) 36% e) 38% In this scenario you learn the offering is over-subscribed. This has no real bearing on the level of risk. It is similar to the herd instinct that led to mass investment in internet stocks or similar mass activities. The fear is that you will be left out and reputational risk takes over from sound judgment. Decision point Three There is something else you should know. Your five- year-old son has just been diagnosed with a rare disease. It is not immediately life-threatening but he is likely to become permanently and severely disabled unless he is treated in three years. The treatment is
expensive and will not be fully covered by your health plan. If your son is treated, the chances of a full recovery are almost 100%, if he is not, the probability of disablement is more than 90%. To get the treatment, you must somehow raise at least R750000 in the next three years. Based on this new information, confirm the level of past success you require to make this investment: a) Less than 50% of past ventures have been successful b) Between 50% and 65% have been successful c) Between 65% and 80% have been successful d) More than 80% have been successful e) I will not invest under any circumstances or unless there is an absolute commitment to getting my money back What people answered: a) 8% b) 11% c) 17% d) 28% e) 36% In this scenario, your son is entered into the equation. The logic here is that those in a lowrisk situation should increase their risk position. You have no other way to raise the money you need. This offers a higher probability than anything else to get hold of the R500000 that you need to supplement your existing home equity. Next week I will cover the remaining two decision points in the exercise and what my responses were. Interestingly, a number of organisations have moved towards such exercises in staff screening for positions and to assess decisionmaking competence and risk tolerance. The results of such exercises have also been supplemented with real world outcomes. The results and models that have originated from such exercises are beyond the scope of this article but provide for an interesting study.
TAKING A RISK . . . People often adjust their views and opinions on risk based on changes in information and circumstance