Why We Underestimate Risk by Omitting Time as a Factor – Bloomberg 07-07-13

Salient to Investors:

Mark Buchanan writes:

Throw a dice: If you get a six, you win $10; if not, you lose $1. Over many gambles, your average profit works out to about 83 cents. However, if when you get six you win 10 times your total current wealth, but anything else and you lose your entire wealth, your expected profit is equal to 83 percent of your total current wealth. Most people won’t take the second bet because they are risk averse.

However, Ole Peters at the London Mathematical Laboratory says averages through time and over probable outcomes are not the same. Which is why businesses are not investing globally when interest rates are at historic lows. Low interest rates won’t encourage borrowing, even to finance positive-return investments, because companies need to pay down their debts, and fear going bust altogether.

Read the full article at  http://www.bloomberg.com/news/2013-07-07/why-we-underestimate-risk-by-omitting-time-as-a-factor.html

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