on managing risk

the risk premium is what distinguishes gambling from speculation. investors who are willing to take on risk because they expect to earn a risk premium are speculating. speculatoin is understaken despite the risk because the speculator sees a favorable risk-return trade-off. in contrast, gambling is the assumption of risk for no purpose beyond the enjoyment of the risk itself. gamblers take on risk even without the prospect of a risk premium.
-essentials of investments

i once remember browsing the internet in boredom and coming across a mind teaser puzzle. a professor at a prestigious university was teaching a class about risk management. being an offbeat professor, the final exam consisted of only one question: what is risk? only one person in the class received an A for the exam. what did he put down?

his one word answer: this.

risk plays a major role not only in gambling or investing, but also in life. of course, nobody would create an entire subject devoted to risk had it not been billions and billions of dollars in the finance industry at stake. nobody thinks about daily, mundane risks--driving cars, walking, using the vending machine (50 vending machine deaths per year), etc--mostly because those risks are negligible. imagine calculating the weighted average of the risks associated with driving. although the chances of losing your life is minimal, you cannot place a value on life. but that, by no means, is a reason to sit at home and vegetate in front of your television (what if a meteor strikes your house? or aliens come, abduct you, and probe your anus mercilessly until you die? very possible.) fuck risks. humans are probably hardwired to take risks regardless, i.e. gamblers.

investing is a crapshoot.

-andy