Reducing RISKS may create more RISKS!

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We all talk about managing the risk of investment. However, sometimes risk management may create one more risk which may be bigger or uncertain. Many times reducing RISKS may create more RISKS!

Reducing RISKS

Reducing RISKS may create more RISKS!

A few days back, I was reading the book “Risk Savvy” by Gerd Gigerenzer, where while giving an example of risk and uncertainty, he gave an example of the 9/11 airstrikes in the USA. He mentions as below:-

“Most of us remember exactly where we were on September 11, 2001. The pictures of the planes crashing into the twin towers of the World Trade Center have been ingrained into our memories. In the meantime, everything appears to have been saying about eh tragic attack. The 9/11 Commission Report, which appeared three years later, focused on how al-Qaeda terrorism evolved and on diplomatic strategies, legal reform, and technological measures. The one measure the 636-page report did not pay attention to, however, was risk-savvy citizens.

The page he is quoting about is reduced travellers aftermath of the 9/11 but increased road accidents during those 2-3 years.

He continues further as..

“We know that after the attack, many Americans stopped flying. Did they stay home or jump into their cars? I have looked for an answer in the transportation statistics. In the months after the attack, the miles driven increased substantially. The increase was particularly strong on the rural interstate highways where long-distance travel happens, jumping by as much as 5% in three months after the attack. “

“The increase in road travel had sobering consequences. Before the attack, the number of fatal traffic accidents remained closely around the average fo the previous five years. Yet in each of the twelve months after 9/11. the number of fatal crashes was above average, and most of the time, even higher than anything that happened in the previous five years. All in all, an estimated sixteen hundred Americans lost their lives on the road due to their decision to avoid the risk of flying

This shows that trying to control one risk of flying by air due to the 9/11 airstrike, they took the road travel and leading to an increase in road accidents. Every one of those traffic victims might still be alive if they had flown instead. During 20002-2005, 2.5 billion passengers too the to the air in US commercial flights. Not a single one died in a major airline crash.

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Just to avoid or managing one risk of death due to air travel, many died in road accident.

Take for example of Corona related risk. After the lockdown, many turned to work from home. Our immediate concentration was how to protect ourselves from Coronavirus. Thanks to the media and social media the way they spread fastly, which in NO WAY USEFUL for us.

But remember one thing, the mortality rate of Corona as per 20th August 2020 is just around 1.93%. But look at the mortality rate of other diseases. As per THIS report, 49.8% may die due to heart-related problems. I am not confirming this report as it is based on 2017 data. However, it gives an indication that there are various other KNOWN diseases that are MOST dangerous to us than CORONA.

We least bother about those diseases and in fact not taking measures to be healthy to avoid such deaths. However, suddenly the Corona turned to be the BIGGEST risky diseases. Due to this, we ignore and many in fact ignored the other causes of death. Building immunity requires good food and physical activity, which may be beneficial for fighting Corona and heart-related issues also. But the media and social media made us concentrate only on Corona by neglecting the bigger risks of our life.

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At the same time, I am not denying that we have to be cautious with Corona. But here, my point is that in trying to manage one risk, we face or forget other risks which may be BIGGER than what we are trying to manage.

This is nothing but the brain’s psychology which took over by Corona. Low probability of events in which many people are suddenly killed called dread risks. If such a situation happens, then we tend to follow as below.

If many people die at one point in time, react with fear and avoid that situation.

How we can apply such situations to investment? NONE predicted that a virus can bring us the economy to such a low level. We planned for many crises. However, the way Corona created the havoc among us made to believe that there are many many UNKNOWN risks in our life. We may manage the risk but can’t predict the risks. In fact, in many cases risks may be bigger than what we predicted.

Conclusion:-Risk management in investment is one strategy. However, there are certain unknown big risks that are beyond our control. Sometimes trying to control one risk may lead to taking higher risks. Hence, be cautious in your risk management strategy of investment. Reducing the risk in a way may unknowingly create a big UNKNOWN RISK. Hence, risk management is a continuous process but not a one time process of your financial life.

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Basu Nivesh
Basav is a SEBI Registered Investment Adviser (SEBI RIA) practicing the Fee-Only Financial Planning Service. He is a CFP (Certified Financial Planner) and blogger at Basu Nivesh. He services around 300+ satisfied clients.
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