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Monday, 28 December 2009

An analysis of choices involving risk

By: Ahmad Syah Ejaz B. Hj. Ismail

Most of the time when we discuss the issue of risk or an extension of a one man's patience involving risk, the reaction would be a simple orthodox analysis of an utility involving risk. Which can be translated into a simple phrase "what can be seen and contemplated outcome can be accounted as a reimbursement of a risk taken for a period of time, and if the risk taken would and might lead to a wasteful effort, then it would be an unnecessary effort to take the risk at the first place".


That was the orthodox thinking in analyzing utility involving risk. But as the world grows and the intellectual thinking develops, the product of Capitalism market had changed and swayed away the orthodox analysis of an utility when it involves risk. The power of an individuals in interpreting the outcome of his personal adventure in trying to gain self empowerment through the concept of individual ownership had shifted the connection between utility and risk to a different degree of perspectives. Since then, what is the right choice to take would depends largely on the sole individuals. Risk and utility cannot anymore be associated with physical gains but also would involves a lot of outcome such as self fulfilment, the comfort of certainty and a premium of sacrifices for a larger gain.


As such it can be seen through the fledglings of the insurance companies in the 21st Century when mankind would rather pay a sum of money out of his monthly salary for a certainty such as physical utility that involves car, house and life that are insured with a premium every month. The new phenomena with the insurance companies were never be seen especially during the Cold War can be summarized as individuals would rather choose certainty in preference of uncertainty.


But then not all certainty are good and accepted as a norms in the 21st Century. The hedge funds speculators would agree with this statement and categorized risk into a different level of rational undertakings. 1) Little or no risk at all - most of the time would not create an opportunity for wealth or can offer no satisfaction of a utility; 2) moderate degree or risk - would create an equal chances of wealth and are acceptable if the risk taken can lead to a wasteful event; 3) Much risk - with a probably an extremely gains; and 4) Highly speculative - an extremely risk.


Individuals would tend to escape risk through many ways. Some of them would sacrifice a sum of their monthly salary and some of them would risk losing many more for a proportion of contemplated gains. There is no right or wrong answers of an acceptable degree of risk when one can still claim that through a loss in accepting risk, one's can still gain an experience of a loss. Maybe the best way to analyze and contemplated risk is by understanding one's own need and one's own desire.

References:

Milton Friendman, On Economics - Selected Papers, The University of Chicago Press, Chicago & London, 2006.

1 comment:

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