Saturday, May 26, 2012

Uncertainty and financial decision

Before seeing this ted talk, I always thought that the scariest thing was taking risk.
But it is not, when you don't give a damn about failing, you don't care about risk.

You are not afraid to die, you are certain about it. What you fear is the uncertainty about what will happen before and after you die.

Economically speaking, risks make no sense :

Imagine you have 5000$ in your hand, and you have two choices : Put it in a saving account, OR buy some stocks with it.

Have you chosen the saving account ?
But what if stock's value increases 100% in two days ? You failed to earn 5000$.
Your choice seems risky for me...

Have you chosen the stocks ?
But what if stock's value drops 50% in two days ?  You loose 2500$.
Your choice seems risky for me...

Failing to earn money, or loosing money are, economically speaking, the same thing.
From the psychology point of view, it is different, your mind prefer failing to earn than loosing.
But there is a second psychological problem with stocks : Uncertainty.
You don't know what will happen, how, when and why.
But there is a great things about stocks, when diversified with low volatility : Some day, it will be better than the performance of you saving account.

Certainty and no-loss garantee is what your money in saving account is paying for.
Neverthesless, for your financial situation and life projects, it might worth it.
Let your own goals and your brain decide, be conscious about your decision or your inaction, acknowledge the psychological and economical consequences, but don't let them choose for you.

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