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What is risk today?

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  • What is risk today?

    About a month ago I finished Adam Smiths "The Wealth of Nations".

    One of the major things that struck me was that "risk" back then was real risk. If you went broke you could truly suffer. The world was much smaller then and failing had true consequences. I mean like starvation and death type things.

    (I know this will probably devolve to a "government sucks" thread but I am going to post anyway.)

    So I wondered. Has this lack of real risk changed the idea of capitalism in some way? I am not just talking about the recent bailouts, though they are important. I am also talking about what we do when times are good.

    Another thing is that I don't think that human behavior has evolved that much from Smith's time. I don't think that we, as a whole, behave or feel or even think all that much differently than we did back then.

    But there is a much bigger cushion. Does this cushion allow us to act inappropriately for longer periods of time?

    Take AIG and the other big banks. Why did it take so long for them to get to critical? The problems had been around for many years. They where "insuring" bad loans with no capital to back them up.

    Capitalism in Smith's day actually had some capital. People took what they really owned and risked it to get more capital. It didn't really sound like capital was the imaginary "credits" we deal with today. It was actual land and physical stores. And you risked that physical stuff.

    This true risk still exists, of course. Especially for the average person saving in for retirement. But in the fantasy land of AIG and it's ilk the players don't seem to be risking anything. The top people get a nice chunk of change regardless of what happens. At worst, and I mean worst, they get nothing. At worst the company fails. So? Why is that risk for the top people? Everybody else seems to be assuming the risk. Even if the government didn't step in, millions of people would have lost much without even knowing AIG existed.

    So, is there really any true risk today? And is the state of things good or bad?
    Iím not racists, I have republican friends. Radio show host.
    - "The essence of tyranny is the denial of complexity". -Jacob Burkhardt
    - "A foolish consistency is the hobgoblin of little minds" - Emerson
    - "People should not be afraid of it's government, government should be afraid of it's People." - Line from V for Vendetta
    - If software were as unreliable as economic theory, there wouldn't be a plane made of anything other than paper that could get off the ground. Jim Fawcette
    - "Let me now state what seems to me the decisive objection to any conservatism which deserves to be called such. It is that by its very nature it cannot offer an alternative to the direction in which we are moving." -Friedrich Hayek
    - "Don't waist your time on me your already the voice inside my head." Blink 182 to my wife

  • #2
    Re: What is risk today?

    I think there's also a natural psychological element, the same one that gates which people tend to save and which tend to dive deep into debt. I'm a compulsive saver and hate being in debt, and prefer to pump payments into principal rather than just pay interest and let my debt climb.

    It's this disparity between those who "need it now" and will run up their credit versus those who can put off enjoyment until later (like me) that creates the entire credit industry.

    I see the dynamic even in WoW, where I play in rags, saving my game money for investing in the market, while others burn through all their cash to get the latest and greatest piece of fighting gear, and then beg in the street for someone to give them cash. Seeing the way those people behave, I think some should need a license before being allowed to borrow money, a license that proves they can be responsible borrowers.

    Ah, here's the term I was digging for:

    http://en.wikipedia.org/wiki/Time_preference
    Dude, seriously, WHAT handkerchief?

    snooggums' density principal: "The more dense a population, the more dense a population."

    Iliana: "You're a great friend but if we're ever chased by zombies I'm tripping you."

    Comment


    • #3
      Re: What is risk today?

      I agree.

      But, like I said, I don't think that basic human psychology has changed since Smith wrote the book.

      I think the primary change is risk and who actually holds it. In smiths day most people just worked to survive. The middle class was relatively small and the vast majority where the poor. If the rich failed they became poor and the majority, the poor, just stayed poor. Those with the capital actually risked their capital.

      Today if the rich fail they become, for the most part, a little less rich. They don't seem to risk their personal capital. This isn't necessarily all bad. Being able to take bigger risks means potential bigger payouts.

      But it does seem to make the traditional ideas of capitalism, as talked about by Smith, somehow out of date.
      Iím not racists, I have republican friends. Radio show host.
      - "The essence of tyranny is the denial of complexity". -Jacob Burkhardt
      - "A foolish consistency is the hobgoblin of little minds" - Emerson
      - "People should not be afraid of it's government, government should be afraid of it's People." - Line from V for Vendetta
      - If software were as unreliable as economic theory, there wouldn't be a plane made of anything other than paper that could get off the ground. Jim Fawcette
      - "Let me now state what seems to me the decisive objection to any conservatism which deserves to be called such. It is that by its very nature it cannot offer an alternative to the direction in which we are moving." -Friedrich Hayek
      - "Don't waist your time on me your already the voice inside my head." Blink 182 to my wife

      Comment


      • #4
        Re: What is risk today?

        Originally posted by ScratchMonkey View Post
        There are various terms for it. Delayed gratification is one used in psychology. It is a pretty good predictor of success. There does seem to be some ways to overcome a basic inability to delay gratification.
        Iím not racists, I have republican friends. Radio show host.
        - "The essence of tyranny is the denial of complexity". -Jacob Burkhardt
        - "A foolish consistency is the hobgoblin of little minds" - Emerson
        - "People should not be afraid of it's government, government should be afraid of it's People." - Line from V for Vendetta
        - If software were as unreliable as economic theory, there wouldn't be a plane made of anything other than paper that could get off the ground. Jim Fawcette
        - "Let me now state what seems to me the decisive objection to any conservatism which deserves to be called such. It is that by its very nature it cannot offer an alternative to the direction in which we are moving." -Friedrich Hayek
        - "Don't waist your time on me your already the voice inside my head." Blink 182 to my wife

        Comment


        • #5
          Re: What is risk today?

          Sorry, but what your talking about is government. It bails us out when we're: sick, old, poor, bankrupt, handicapped, stupid, rich, lazy, weak...In Smiths day all those folks would be dead. Life expectancy was 32. We don't have serious risk in our time. Not being able to vacation in Italy when your 75 is not comparable. We should be happy to have problems like AIG. If AIG played their shenanigans in Smiths day all those boys would be shot, but since no one is dying because of them we let them walk. We are fat and comfortable. The only simularity is that the higher functioning walk all over the lower functioning.

          Comment


          • #6
            Re: What is risk today?

            Originally posted by Hambergler View Post
            Sorry, but what your talking about is government. It bails us out when we're: sick, old, poor, bankrupt, handicapped, stupid, rich, lazy, weak...In Smiths day all those folks would be dead. Life expectancy was 32. We don't have serious risk in our time. Not being able to vacation in Italy when your 75 is not comparable. We should be happy to have problems like AIG. If AIG played their shenanigans in Smiths day all those boys would be shot, but since no one is dying because of them we let them walk. We are fat and comfortable. The only simularity is that the higher functioning walk all over the lower functioning.
            It is not just government. The world itself has become less risky. The safety nets from both government and private sector have become wider and they catch more people.

            But you are right. Back in the day failing could bring true hardship.

            My question is how does that affect the idea capitalism?
            Iím not racists, I have republican friends. Radio show host.
            - "The essence of tyranny is the denial of complexity". -Jacob Burkhardt
            - "A foolish consistency is the hobgoblin of little minds" - Emerson
            - "People should not be afraid of it's government, government should be afraid of it's People." - Line from V for Vendetta
            - If software were as unreliable as economic theory, there wouldn't be a plane made of anything other than paper that could get off the ground. Jim Fawcette
            - "Let me now state what seems to me the decisive objection to any conservatism which deserves to be called such. It is that by its very nature it cannot offer an alternative to the direction in which we are moving." -Friedrich Hayek
            - "Don't waist your time on me your already the voice inside my head." Blink 182 to my wife

            Comment

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