A busy week but well worth it

Have had a great past week but boy am I behind on regular things. I was able to spend 3 days at LTUE last Thursday through Saturday. My daughter Emily and I had a presentation on Friday that I thought went particularly well. Emily is really amazing. Go check out her website/blog. I have a link on this blog. I will start a new economics/finance topic here next week. However, I have to now get caught up on work and regular projects I let slip as I was preparing for and enjoying LTUE .

What is your risk level (part 4)

Government is designed not to lose & Risk summary

             Now think about a typical government department or function. How is success measured for government functions? What constitutes doing a good job? How does one do a great job? What is likely to happen if an individual tries something new and fails? As you think about government functions are they graded on how much money is made or is it on how much money is not lost. I believe that for government functions the goal is not to make money but to not lose it. A typical government function is not graded on succeeding but on not failing. It tends to not matter how many things go right but how many things go wrong. One failure can wipe out a multitude of successes. Think of government as a defensive function not an offensive innovation. If one is trying to win a battle are all the soldiers given shields (government) or are they given swords (private sector)? The army with swords may lose some men but will likely win the battle. The army with shields will not have the ability to win, only possibly not to lose. In government there will not likely be innovation, improvement, or  profit motivations. There will be support for status quo, minimization of failures, and entrenchment (defensive positions). I believe governmental officials tend not to be rewarded for taking risks (swords) but for not failing (shields).

             This underlying philosophy has serious implications. In general, innovation, new products and wealth generation come from the private sector not from government. Why, because innovation generally involves risk taking and the very nature of government is to avoid risks.

             As a general review, we discussed risk averse and risk tolerance and some ideas that show that the magnitude of the impact of an outcome can affect or view of the results. Many small impacts may not bother us as much as a few large impacts, especially negative changes. We looked at some evidence which supports the observed phenomena of the diminished capacity of the adolescent male brain as it approaches the 12 to 13 age range (which seems to reverse itself in most cases by the early 20s). The risk  that one does not know they don’t know can have significant ramifications. We looked at some examples of risk as it applies to specific outcomes and risk as it applies to ranges of activities or outcomes. We observed the distinction between private sector and public sector (governmental) risk taking and its possible impact.

            It was suggested that risk tolerance or avoidance could be used in character and story line development. Probability, the risks of uncertainty and of the unknown unknown could also apply to character and story line plots but may also be applied to world building and back story development. Such risks can be used to shape societies, cultures and even species or races. Can societies change their risk perception? Does a society by its nature lock in risk levels or understandings so that the individual must struggle to break free of norms expected behavior? Are risk traits inherited or learned, by an individual,  group or race. Does environment effect risk perception and action?

             Let me know your thoughts and ideas.

What is your risk level (part 3) update

There are different types of winning …. and losing

              Let us start with a quick review of how we perceive risk from part 1 and expand on the concept. Risk can be related to volatility. High risk can imply great or high volatility in relation to expected outcomes or solutions. Suppose a desired outcome is winning exactly $5,000, what is the likelihood of getting our desired outcome if the possible range of outcomes could be from $10,000 to -$10,000 with an equal chance of any integer on a single draw. Low risk suggests predictability or stability in the expected outcomes or solutions i.e. if our desired outcome is 1, what is the likelihood of drawing 1 (on a single draw) if the values available are between 2 and 0. In our first example, if we need to get $5,000 we will be very disappointed because the risk is so great that we will not get $5,000 (the odds are 1 in 20,000). However our upside potential (risk of getting equal to or more than $5,000) is much better. Our odds have improved to 5,000 in 20,000 or 1 in 4. We may be disappointed with the selection but not unhappy with the outcome.

             Risk can also relate to a specific outcome and the probability of that outcome. Assume option 1 has a 25% probability (1 in 4 chance) of making $1,000 and a 75% probability (3 in 4 chance) of making $0. Assume it costs $250 to participate. Remember, in business, finance and especially in investing there is always a cost to participate, if someone tells you there is no cost keep looking until you find it (I will get off my soapbox now). Option 2 has the same cost to participate but the probabilities are reversed. Now it is a 75% probability of making $1,000 and only 25% probability of making $0. Option 1 is substantially more risky than option 2. The risk is not in earning an amount different than the desired outcome ($1,000) but the likelihood of realizing or getting the desired outcome.

             Many business risks deal with a range of possible outcomes from very successful to significant lose. However, the payout or benefit of a successful outcome may be so great that the risk may be considered acceptable. Conversely, the cost of failure may be relatively small so that any lose is not particularly damaging. A business may be able to sustain a number of relatively small losses if the occasional success is great enough. In that case a risky venture, meaning a venture with significant volatility, may be not only acceptable but quite profitable. If one is accurate in predicting the probability (likelihood) of the possible outcomes then the risk of the unknown happening is greatly reduced. If one is uncertain of the possible outcomes then the exposure to risk can become enormous.

             We generally see that in order to generate the maximum possible wealth a certain amount of risk is usually involved. The very definition of increased risk as we discussed earlier, that results vary significantly from expected outcomes, suggests that there is likely a large element of the unknown or even unknowable in such situations. By 1985 Steve Jobs was cofounder, chairman and CEO of  Apple Inc. However in that year he was booted from the company. Many at the time may have thought that Jobs was done or finished. But by 1997 he was de facto chief of Apple Inc. again. In between 1985 and 1997 he had started another firm, NeXT, and acquired the computer graphics division of Lucasfilm which he spun off as Pixar. After returning to Apple in 1996 he is credited with helping engineer the turnaround of Apple and creating new products and innovations that made it the most valuable publicly traded company in 2011. Jobs must have been exposed to an innumerable number of risks. Many of them were likely negative but several were positive or upside risks.

          Next we will look at government and risk perception and some final thoughts.