When it comes to Investment Risk- Are you Country or are you Rock? Part 1

facebooktwitterlinkedinby featherDon't steal my savingsThe way economists typically measure risk preferences is the ratio between someone’s pain from losing money and their pleasure from gaining it. If someone really hates losing money and doesn’t really care that much about gaining more of it, clearly they will be loath to risk any losses.

More formally, for economists, measuring risk preferences entails estimating a utility of wealth function that describes how happy an individual is with each level of wealth. This function can then be used to calculate how happy or sad the individual would be about moving from one wealth position to another. How risk averse a person is can be described by how concave the function is in other words how much the subjective value of each additional dollar declines as wealth increases.. this in turn determines at any given wealth level, how much more valuable a dollar lost is relative to a dollar gained.

We discover this by offering the individual a choice between taking some gamble or getting some other amount for sure and observing whether he chooses the gamble or the sure thing.

At BH Wealth we use a tool1 which is extremely simple and specific. It’s choices are binary, using numbers that are familiar to investors. This allows precise estimation of indifference points and minimizes the risk that an investor will make mistakes while taking the questionnaire.

Want to see if you are Country or Rock? Take our questionnaire and see for your self.

Just click on home and scroll to the bottom of the page and click on the “What Your Risk Number? button.

1-RiskAlyze

Written by Jaimie Blackman

Jaimie Blackman

Jaimie Blackman has created Sound Financial Decisions ™ powered by MoneyCapsules®, to help guide business owners through the complexities of succession planning.

Jaimie writes “Smart Succession”, a monthly column in Music Inc., and also writes a bimonthly column for Canadian Music Trades magazine. He has spoken at NAMM U Idea Center, and at Yamah’s Succession Advantage.

As a financial literacy educator he has taught at New York University and has lectured at the 92nd Street Y, Marymount Manhattan College, and CUNY.

As President of BH Wealth Management, Jaimie also helps his clients implement investment and insurance solutions which are aligned to their personal values. Visit bhwealth.com to learn more.

To subscribe to Jaimie’s Succession Success: Insights for Music Retailers, visit moneycapsules.com.

The purpose of this post is to educate. Our content should not be construed as advice. If legal, tax or other advice is required by the readers, professional advice should be sought.

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