Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Why our risk appetite is decreasing

Last weekend, the Dutch Financial Times featured two articles both related to risk appetite (article 1, article 2, my blogs). When combined, these articles argue that our risk appetite is decreasing following (i) our (increasing) demand for control, (ii) our (increasing) fear of failure, and (iii) our belief that a “malleable society” is feasible. I had to digest on their arguments and/but I think, feel and believe these are valid.

Risk appetite or risk tolerance is basically an expression of our willingness for taking risk. Organizations express their risk appetite through a monetary amount, which reflects the financial impact on the Profit & Loss statement, Balance sheet or both (eg, Investopedia, Wiki).

Since Life existed, it ran the risk of (total) destruction by the classical elements (eg, earthquakes, fire, flooding, lightning, storms). Many lifeforms are building shelters while humans build houses to protect against these elements. Taking measures against risks is called risk mitigation, a stage within risk management.

Since about 1800, the Technological Revolution of 1800-2100 is changing human lives. To date, there have been 3 major waves: (1) mechanization or the Industrial Revolution (1800-1900), (2) automation (1900-2000), (3) artificial intelligence and robotics (2000-2100); my blogs. Possibly, a 4th is also on its way: mRNA technology in healthcare (my recent blog). Technology (my blogs) is creating a sense of being in control.

Ultimately, every human will come to realise that control is a human (philosophical) belief (ie, an opinion) and not a fact. Also see my 2016 blog: Why are opinions stronger than facts? For some, one or two failures may bring this realization. For others, it may be a burn-out and subsequent depression (my blogs).

In 2001, Nassim Nicholas Taleb published his book Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets. In 2007, he further explained his views in his book: The Black Swan: The (LO: catastrophic) Impact of the Highly Improbable. Technology has made us underestimate these black swan events.

Hence, we are building things with a (statistical) reliability of – say – 95% and a confidence interval of – say – 90%, 95% or 98% (example). This may sound impressive but is it really?

The global approach towards the Covid-19 pandemic is a current example of our decreasing risk appetite following (i) our (increasing) demand for control, (ii) our (increasing) fear of failure, and (iii) our belief that a “malleable society” is feasible. The 1918 (Spanish) flu, “one of the deadliest pandemics in human history”, was soon forgotten (my blog-1, my blog-2, Wired). Its seasonal recurrence causes no more panic.

Our (increasing) reliance on technology is bound to create a black swan event.

“Technology is a useful servant but a dangerous master.” A quote from the 1921 Nobel lecture by Christian Lous Lange (1869-1938), a “Norwegian historian, teacher, and political scientist”.

Master and Servant (1984) by Depeche Mode
artists, lyrics, video, Wiki-1, Wiki-2

Note: all markings (bolditalicunderlining) by LO unless stated otherwise.

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