Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Useful tips on how to get risk fit

298 views

Published on

I N MY recent journey through the IACCM Managed Learning programme (www.iaccm.com), I was exposed to a very interesting exercise that participants are required to participate in. The exercise covers risk, people’s perceptions of it and its impact on decision making. With risk so high on the corporate agenda such exercises are interesting and extremely valuable.

Published in: Business
  • Be the first to comment

  • Be the first to like this

Useful tips on how to get risk fit

  1. 1. Useful tips on how to get risk fitRisk is influenced by people’s perceptions and decission-makingGREGG BARRETTI N MY recent journey through the IACCM Managed Learning programme(www.iaccm.com), I was exposed to a very interesting exercise that participants are requiredto participate in. The exercise covers risk, people’s perceptions of it and its impact ondecision making. With risk so high on the corporate agenda such exercises are interesting andextremely valuable.To appreciate just how people adjust their views on risk based on changes in information andcircumstance, let me take you through the exercise and how people responded.The situation:You have a friend who is a wealthy entrepreneur. She has made a lot of money throughsuccessful new ventures and business initiatives. You know she has also made many of herfamily and friends wealthy who invested in her schemes.She writes to tell you that she has identified a new opportunity and is seeking investors for it.She is making this offer to only 100 people and needs each of them to invest a minimum ofR200  000 raising at least R20  million in total. She will be investing R5  million of herown money and will only proceed – and draw on your investment – if she reaches the total ofR25  million that is required.She estimates that your return from this investment will be at least R1  million and that thiswill be achieved in two years.The problem is, you do not have easy access to R200  000. Your only significant asset isyour house, which is worth about R350  000 and you have an existing home loan of nearlyR100  000. So you would have to raise money by borrowing against your house as securityDecision point One:You consult two friends – one is an accountant, the other a lawyer. You ask if they couldcheck out your friend and the success rate of her past ventures. They tell you several dayslater that she appears to be very honest.Would you make this investment if they told you that:a) Less than 50% of past ventures have been successfulb) Between 50% and 65% have been successfulc) Between 65% and 80% have been successfuld) More than 80% have been successful
  2. 2. e) I will not invest under any circumstances or unless there is an absolute commitment togetting my money backWhat 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 torisk – our propensity to accept risk.Decision point Two:There are now two days to go before the offer closes. You learn that it is significantlyoversubscribed and many people decided to invest more than the minimum amount. Thisdoes not affect your ability to invest nor does it change the rate of forecast return. You knowsome of those who have decided to offer a higher investment are respected and seasonedbusiness people.Based on this new information, confirm the level of past success you require to make thisinvestment:a) Less than 50% of past ventures have been successfulb) Between 50% and 65% have been successfulc) Between 65% and 80% have been successfuld) More than 80% have been successfule) I will not invest under any circumstances or unless there is an absolute commitment togetting my money backWhat 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 thelevel of risk. It is similar to the herd instinct that led to mass investment in internet stocks orsimilar “mass” activities. The fear is that you will be left out and reputational risk takes overfrom sound judgment.Decision point ThreeThere is something else you should know. Your five- year-old son has just been diagnosedwith a rare disease. It is not immediately life-threatening but he is likely to becomepermanently and severely disabled unless he is treated in three years. The treatment is
  3. 3. expensive and will not be fully covered by your health plan. If your son is treated, thechances of a full recovery are almost 100%, if he is not, the probability of disablement ismore than 90%. To get the treatment, you must somehow raise at least R750  000 in the nextthree years.Based on this new information, confirm the level of past success you require to make thisinvestment:a) Less than 50% of past ventures have been successfulb) Between 50% and 65% have been successfulc) Between 65% and 80% have been successfuld) More than 80% have been successfule) I will not invest under any circumstances or unless there is an absolute commitment togetting my money backWhat 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 low-risk situation should increase their risk position. You have no other way to raise the moneyyou need.This offers a higher probability than anything else to get hold of the R500  000 that you needto supplement your existing home equity. Next week I will cover the remaining two decisionpoints in the exercise and what my responses were. Interestingly, a number of organisationshave moved towards such exercises in staff screening for positions and to assess decision-making competence and risk tolerance. The results of such exercises have also beensupplemented with real world outcomes.The results and models that have originated from such exercises are beyond the scope of thisarticle but provide for an interesting study.TAKING A RISK . . . People often adjust their views and opinions on risk based on changes ininformation and circumstance

×