Friday, 2 September 2022

Risking it all

The Beginning

Your Wealth is a custom Enterprise briefing for people just like you: Executives, entrepreneurs and builders who know that time isn’t money, but that time and money are feedstock for the one thing that matters most in life: Your family, however you define it.

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RISK

Nothing ventured, nothing gained? In a post-pandemic world, the future can seem harder to predict and our appetite for taking risks may have shrunk. But in business as in life, there’s rarely a reward for playing it safe. Accepting a certain level of risk opens us up to new experiences and possibilities — and bold moves can pay off in the long run. In this month’s Your Wealth, we throw caution to the wind and embrace the role of risk in our lives.

RISK AND YOUR BRAIN

Risks are all around us. How we perceive and respond to them is pretty subjective: Our judgment calls on risk are just as complex and contradictory as human cognition — and the way most of us evaluate risk is far from rational, no matter how objective we claim to be. A mix of nature and nurture shape our perceptions and responses to risk in every area of life—sometimes with potentially dangerous consequences.

So how do we evaluate risk? We each filter data on how risky an action might be through our own belief and value systems — and those values are in turn shaped by the societal and cultural context in which we were raised.

The debate over vaccines is a prescient example: People with a pre-existing mistrust of government or big pharma perceive the risks associated with vaccines as greater — and the risks of contracting the diseases they prevent as lower — than the average person, studies (here and here) show.

Some of us just want to look on the bright side: Risk perception can be riddled with what researchers call optimism bias. Optimism bias isn’t just thinking good things are more likely to happen than bad things — it’s thinking that good things are more likely to happen *to you*, while bad things are more likely to happen to others. During the pandemic, most people surveyed judged themselves to be at a lower risk of getting covid than the average person — a dangerous risk assessment misstep born of optimism bias.

But the opposite is also true: Judgment calls on risk can also skew overly pessimistic, especially when people become hyper aware of dangers. Humans have a tendency to make decisions based on what jumps out to us in our minds, i.e. memorable events, things we see and read about a lot, or things that happened recently. This tendency — known as the availability heuristic — can cause people to over-exaggerate risk of a certain event if they have previous experience of it happening in their immediate surroundings or they’ve been exposed to heavy media coverage of it.

There are dozens of cognitive biases that inform our view of the world and the risks it holds: Exposure therapy has long been used by psychologists to help people confront their fears in small doses. But exposure to danger has also been found to reduce people’s perception of risk — for better or worse — in non-clinical settings. The more we do something, the less it worries us, leading risky behaviors to become normalized. This is also linked to other cognitive shortcuts like confirmation bias, which can see people downgrade their perception of risk based on a few incidents where they took a risk that turned out fine.

How to counter your irrational thinking on risk? Pay attention to the facts — but accept that how much risk you can handle is ultimately a personal call. Yes, you could do a rigorous assessment of all the available data on a given decision, weigh up the costs and benefits, and strategize for all the possible outcomes — and if you’re weighing up a major life or business decision, we recommend that you do. But the reality is that we make countless split-second risk assessments every day. It’s impossible to sort through the emotional, social, and neurochemical soup that informs that “gut feeling” for every single decision – and earth-shattering events are almost impossible to predict anyway. The best you can do is trust your own boundaries when it comes to risk and accept that in this life, there is no such thing as a sure thing.

RISKY BUSINESS

There’s no such thing as a guaranteed investment — but some are a whole lot riskier than others. The rise of crypto and meme stocks in recent years has seen self-proclaimed investment gurus take to social media to promise endless riches to retail traders willing to take big risks — just as institutional investors pull out of volatile growth markets on fears of a looming global recession. In the current climate, how do you assess the riskiness of any given investment? And how much risk is too much when it comes to your wealth?

Investing is inherently risky. The key is knowing how much risk you’re willing to take on: Before deciding where an investor parks their capital, they must determine their own risk profile. This self-assessment lets you reflect on what your investment goals are and, crucially, how much you’re prepared to lose in their pursuit. Individual appetite for risk is a key component of this equation. A financial advisor can help you flesh out your personal risk profile in detail. For a rough idea, there’s no shortage of online risk profile questionnaires.

The size of your war chest will play a big role in determining your risk profile. Investors with a larger pool of capital to draw from have the leeway to take on some riskier plays. Heavyweight investors are better able to hedge — they can spread their capital across more and less risky investments, and will have a comfortable cushion to fall back on if the price of a shiny new asset goes south. For those without an infinite store of powder who are looking to manage and grow their life savings, caution is key. A more modest investor will want to minimize the risk of a loss that could jeopardize their ability to meet other financial obligations or imperil the future they’ve been working for.

The luxury of time also factors into this formula: Typically, the longer a person or entity is able to hold onto an investment, the better the outcome—and this is especially true for riskier assets like stocks, where riding out volatile market activity usually pays dividends over the long term.

The degree of risk varies depending on the asset: Broadly speaking, asset classes sit on a risk-reward spectrum that charts how safe they are compared to their potential returns. Leaving your wealth in the bank comes with little to no risk — but won’t give you the returns to secure your retirement. Bonds sit in the middle of the spectrum, offering higher income but exposing you to a certain level of risk, which increases the longer the term of the bond. Equities occupy the top-right corner of the chart — they’re more volatile since they’re subject to market risk, but historically offer the highest payout in the long term.

Alternative assets like cryptocurrencies and NFTs are even riskier but dangle the potential for astronomical returns—which for some investors has been a good enough reason to scramble to get a hold of the next big thing. That’s meant inexperienced retail traders have often ended up holding the bag, while larger movers make or break a new currency.

It’s not just poor risk assessment skills that can lead us to make bad investments: A whole host of psychological and emotional factors are at play when it comes to money management. FOMO (the fear of missing out), investor overconfidence, the sunk cost fallacy, and influence from peers are just some of the irrational behaviors that can lead to poor investor judgment calls.

Even the professionals struggle to get it right: Active investors — fund managers whose job it is to do the research and pick and choose securities on behalf of their backers — have historically not been able to match the returns of passive funds, which track the value of any given asset (the S&P500, for example) over time. Over a 20-year period, about 90% of index funds tracking companies of all sizes outperformed their active counterparts, according to one 2020 study. Even over a three-year period, more than half of index funds outperformed active ones.

YOUR TOP 5

Your top 5 pieces of business and economic news in August:

RISK FOR THRILLS

There’s nothing quite like a good thrill: Whether it’s popping wheelies on the Ring Road or base jumping in the Alps, some people’s idea of fun seems to come with a side-serving of extreme personal risk.

Some athletes thrill-seek like it’s their day job: There’s no shortage of people around the world flirting with danger, but some take it a step further than most in the pursuit of record-breaking feats. Rock climber Alex Honnold gained fame when he became the first person to free solo the 3k-foot high El Capitan rock face in Yosemite National Park in 2017. Making his ascent without ropes or safety gear, one wrong maneuver that day would have sent Honnold plummeting to his death. Big wave surfer Sebastian Steudtener is another titan in the world of extreme sports, who secured his spot in history after breaking the world record for the biggest wave ever surfed in 2020. The German-born surfer sliced through an 86-foot high wave off the Portuguese coast, narrowly avoiding being pummeled by one of the world’s most powerful swells.

What it comes down to is mostly just brain chemistry: When faced with danger, our heart rates spike, our stomachs churn and our hands start to sweat. That's all thanks to strong chemical signals from the brain to the rest of the body, sending it into survival mode. Adrenaline, dopamine, endorphins, and other chemicals rush into the bloodstream. One effect is increased anxiety — but these “reward chemicals” can also trigger a high as the brain primes us to fight the threat, or run from it. “It’s like having superpowers for a very brief time,” one researcher tells the Atlantic.

Could this adrenaline high be good for mental health? Those who practice a high-adrenaline hobby are often fully engrossed in the activity while they’re doing it—what some call a flow state. This period of extreme focus, researchers have found, can boost mood, creativity, and stress management.

A hunter-gatherer thing: Alpine climbing or bungee jumping could be the modern day equivalent to hunting, at least in brain chemistry terms. “Hunting was one of the early expressions of sensation-seeking, particularly when [our early ancestors] began to hunt large mammals where there's a high risk involved, ” Marvin Zuckerman, psychologist at the University of Delaware tells the Atlantic.

Thrills are not for everyone: The tendency to seek out risk may depend on where you fall on what some researchers call the “sensation seeking scale.” People who have a natural tendency to seek out the feelings associated with risk are considered high-sensation seekers, while those who fall on the opposite end of the spectrum aren’t all that interested in experiencing these intense physical and neurological sensations.

Local thrills? You don’t have to go far to get your adrenaline pumping. Try surfing the sand dunes in Fayoum, or dirt biking in Sakkara with Ride Now Egypt. If you want to head to the skies, there’s paragliding over the pyramids or parasailing in the Red Sea. For the ultimate kick, throw yourself out a plane over the Pharaohs' tombs.

But beware, you might find yourself itching for more: Your brain and body can easily develop a tolerance to thrills. The body fine tunes its alarm systems according to what it has successfully lived through, dialing down the fear factor the more familiar an activity becomes. That leads some to seek out ever-more-risky activities as they chase the chemical rush that danger provides.

ONLINE RISK

If there’s one risk we all need to minimize, it’s the risk to our cybersecurity. Managing security risks in the real world comes as second nature to most of us — we don’t leave our front door unlocked or our car keys in the ignition. Managing our cybersecurity, on the other hand, isn’t so instinctive. Nearly two-thirds of people reuse the same two or three passwords across all their online accounts, according to one study. That means a hacker who manages to access your Facebook account could also break into your Amazon account, work email, smartphone, Google Maps history, bank accounts, and more — and once your personal data has been stolen, it can be extremely hard to wrest back control of your online identity.

The CBE is trying to reduce cybersecurity risks in the banking sector. The Central Bank of Egypt (CBE) earlier this year launched a dedicated cybersecurity center to identify and thwart cyberattacks and buff up banks’ defenses in light of a global rise in phishing and other kinds of online information fraud.

The only surefire way to prevent being hacked is to never use the internet. But unless you plan on spending the rest of your life in a cave, here are some top tips to keep ahead of cybercriminals.

#1- It’s past time to retire “password123”: The first step to better cybersecurity is sorting your password hygiene. Switch to longer and more secure “passphrases” rather than one-word passwords. Use two-factor authentication — linking your phone number to your account, for example — wherever possible. And please, we implore you — use entirely different passwords for each account, not just variants of the same password. Once hackers have a password for one of your accounts, they will attempt it on every other account they can find.

#2- Never click on random links: Be wary of all attachments and links that slide into your inbox. Hover your mouse over them to see where they lead before clicking to make sure it’s not a malicious website trying to track your location or steal private information. These kinds of phishing scams are one of the simplest and most common methods that hackers use to steal passwords, according to Cisco’s 2021 Threat Report.. And remember — your bank, telecoms company, healthcare provider, and any good client or business partner shouldn’t ask you to share sensitive information by email or over the phone.

#3- Don't use public Wi-Fi to access sensitive information. Many people still use public networks to check their bank balance or make online purchases without being aware of the dangers. Hackers can set up bogus networks, intercept communications between your device and the network, or deploy malware to spy on your activity while surfing from a public hotspot. If you’re out and about and want to browse more securely, it’s best to jump on a private (and password-encrypted) hotspot from your mobile device.

#4- Use a credit card for your online purchases, not a debit card. You’re better off getting your credit card details stolen than losing control over your debit card information. Credit card fraud is not good — but at least your main checking account isn’t compromised and any false charges are easier to dispute. Even for legitimate purchases, a credit card will offer better consumer safeguards in case your package never shows up or isn’t quite what you had in mind.

#5- Cover your social media privacy basics: Check your privacy settings, and log out every now and then to see your profile as it appears to strangers. Never accept a friend request from someone you haven’t met IRL — and try not to announce your exact location to the world. Enable login notifications so you can find out if someone other than you logs into your social media accounts. And if you log onto apps through Facebook, check what permissions the app is granted in your settings. You may be unwittingly allowing your data to be sent to third parties.

#6- Update, update update: Make sure you’re using the most recent versions of your apps and software, as companies continually identify and repair security bugs.

LEGENDARY RISK TAKERS

“The biggest risk is not taking any risk,” Meta’s Mark Zuckerberg said back in 2011, and his quote has been doing the rounds as an inspirational entrepreneur meme ever since. Risking big for bigger gains has become a key pillar of the Silicon-Valley innovator entrepreneur archetype we’ve all come to know and adore / revile. It’s wisdom that the Zuck still lives by, if his USD 10 bn wager on what he believes is the internet’s new frontier is anything to go by. The jury’s still out on whether the metaverse play is brave or foolish — but it can’t be denied that some of the greatest progress humanity has made came at great risk.

The miracle of flight: Aviation pioneers Wilbur and Orville Wright shared a love of mechanics and a lack of any kind of professional training. They are said to have been inspired to start testing out their own aircraft after following the work of a German aviator who died piloting his own glider — and withstood the mockery of the press and colleagues in the industry to prototype the world’s first aircraft.

At great personal risk, Wilbur manned the first flight of their heavier-than-air plane in 1903. The 59-second flight changed the course of history and birthed an industry now worth some USD 3.5 tn.

And the even bigger miracle of spaceflight: Blasting a rocket ship into space is incredibly risky — and early space shuttle missions were the riskiest of all. Back in the 1980s, the odds of an astronaut dying within minutes of a launch were around one in nine, astronaut Chris Hadfield explains in this video on risk-taking for cosmonauts (watch, runtime: 3:48). These days, it’s about one in 38.

“It’s pretty hard to get life insurance as an astronaut,” Hadfield says. But he insists the risk is worth it. “Your job is not to be an incompetent, nervous passenger. Your job is to defeat the risk.”

Major technological breakthroughs don’t come without a big dollop of risk: It’s an old cliche to point out that Bill Gates dropped out of Harvard University to work on building Microsoft in 1975, but there’s an instructive message behind the anecdote: Sometimes a decision that seems unwise in the short term can end up reaping rewards.

Real innovations take years to embed, but once they do, they can change everything. “We are tackling problems where progress is measured not just in years, but often decades — where your end goal doesn’t change, but your path to get there might have to,” Gates says.

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