Why We're So Risk-Averse: "We Can't Take That Chance"

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

If our faith in the future and our resilience is near-zero, then we can't take any chances.

You've probably noticed how risk-averse Hollywood has become: the big summer movies are all extensions of existing franchises--mixing up the superheroes in new combinations, or remaking hit films from the past--all safe bets.

The trend to "playing it safe" is not limited to Hollywood:--we see risk aversion in every sphere of the economy and society.

The unfailingly stimulating Ben Hunt of the Epsilon Theory newsletter has been highlighting the connection between super-easy-money financial policy and the avoidance of risk that's so apparent in Corporate America: rather than take a chance that an investment in new technology, worker productivity etc. will increase sales and profit margins, corporations are borrowing super-cheap money and using this "nearly free money" to buy back their own shares in the stock market. ( Gradually and Then Suddenly).

This reduction of outstanding shares boosts sales and profits per share, creating higher earnings per share without actually boosting sales or profits.

Hunt's point is that easy-money policies actually reduce the incentives to take risks to improve productivity/ profitability, and this ends up crippling our economy, as growth and productivity require taking on some risk. No risk-taking = no productivity gains and thus no gains in wealth, prosperity, social mobility, etc.

I agree with Hunt's description of the perverse incentives created by easy-money policies, but I don't think that's the only driver of risk aversion, or even the primary driver.

We see this pervasive avoidance of risk in other areas as well--for example, in what college students are choosing as majors and what policy makers at the highest levels (the Federal Reserve, for example) are saying, in word and deed, "We Can't Take That Chance."

In the case of the Fed, the Fed is saying "We Can't Take the Chance" that a recession would be positive, i.e. that a normal business-credit-cycle recession would do its intended job: clear out the deadwood of defaulted loans and eliminate marginal borrowers, lenders and enterprises.

This clearing of deadwood then sets the stage for healthy expansion of credit and business.

The Fed is clearly fearful that even a mild recession will cascade into something much worse--and something beyond their control.

This gives us some insight into the dynamics of risk avoidance: when we're confident that we can handle whatever comes our way, then we're free to take a risk on something that could yield long-lasting, important gains.

In other words, if we're confident we can handle the downside of a risk not paying off, then we're able to accept some risks as the necessary means of reaping major gains.

But if we're afraid that any loss might collapse our world, then "We Can't Take the Chance."

Put another way--if our faith in the future and our resilience is near-zero, then we can't take any chances. We are restricted to taking only the safest path, even if it means foregoing all the really big gains that are reserved for those willing to accept some risk.

This is an enormously important dynamic, for it hollows out the entire society and economy, one "we can't take any chances" at a time.

One of points in this essay on Survivorship Bias is that "luck" is not just a matter of belief or some sort of magic: those who feel lucky are confident enough to absorb a wide range of contexts and opportunities. They don't cross off most of a list, they scan it with an open mind. The lucky are lucky because they don't arbitrarily narrow the opportunities they happen upon out of fear, i.e. we can't take any chances.

It's the confidence of the lucky that's lacking in risk avoidance, and the terrible irony is avoidance of risk is also avoidance of opportunity.

There's one more irony at work in this dynamic: as systemic risk of collapse rises, participants intuitively shun risk and start "playing it safe." But since risk is now systemic, risk avoidance by enterprises and households won't lower the risk of the whole rickety financial system giving way.

Rather, each individual decision of "we can't take the chance" further weakens the economy's resilience to financial disruption by removing the gains that are only possible by taking on risk.

Few (if any) mainstream economic pundits seem to grasp this dynamic.

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GUS100CORRINA's picture

Why We're So Risk-Averse: "We Can't Take That Chance"

My response: What an unbelievable chart. Add in MARGIN DEBT, GOVERNMENT DEBT and UNFUNDED LIABILITIES, we have the perfect storm developing right before our very eyes.

DEPRESSING and NO ONE SEEMS TO CARE ANYMORE!!!!

hola dos cola's picture

I do. Not depressing at all.

From personal experience only, the author is right about the mechanism. Not sure why it is worth an article though.

2c: there is two sides to a coin. Redefine risk accordingly. Hope that helps.

 

 

AlphaSeraph's picture

It should come as no surprise that risk appetite is low when debt (across the board) is so high. It's fairly rational behavior in a totally irrational political economy. 

Rainman's picture

Is he saying now's not a good time to buy high yield ?

MoonWatcher's picture

There is no risk in the so called stock markets, the only way is up regardless of reality.

venturen's picture

the richest guy in my state is a 40 year old hedgefund manager...THAT MAKES NOTHING...just steals money with a computer...and the FED LOVES HIM AND HIS Felons!

DrBrown's picture

Care about what?

Hyjinx's picture

Bullshit definition of luck. You either have it or you don't - one can take many perfectly calculated risks and come out the loser every time. Unfortunately I know all about this firsthand.

CRM114's picture

With respect, in my experience luck isn't a binary thing. Don't use it up if you don't have too.

And your experience is in...?

CRM114's picture

Firstly, it doesn't matter about resilience at very low faith levels. No matter how much resilience one has, then one still puts everything into more resilience. Ask anyone who's been in harm's way. You spend almost all your spare time further checking, testing, and running through 'what if?'s in your head.

Secondly, to not be risk averse, there has to be a belief that luck has a role. I'm a lucky guy, but I am taking no risks with the market because my luck is not a factor - the markets are rigged.

Lastly, I actually cannot assess the risk, for the rules of the game are unknown to me. The markets parted company with any hard data a long time ago, and all the stats from which I am supposed to assess risk are either rigged, or do not represent reality, or both.

No sane person walks into a rigged game, no matter how lucky they normally feel. Their feeling of 'luck' will simply be used to sucker them into greater losses.

itstippy's picture

Risk-aversion is rampant in middle class Americans' everyday lives.  People have been led to believe that there are terrists behind every tree trying to blow them up, gangbangers on every corner popping away at strangers, and child abducters in every park waiting to grab their children.  I see 3-year-olds on tricycles wearing crash helmets, knee pads, and elbow pads.  Danger lurks everywhere!

However, these same middle class Americans are absolutely fearless about taking on debt.  They've been led to believe that the Government will always protect them with a financial safety net, and they should not worry about being up to their armpits in debt.

It's certainly a different society than the one I grew up in (I'm a baby boomer raised in a small town in South Central Wisconsin).  My parents let us kids run freely about, but watched their finances like hawks.

Hikikomori's picture

It's the end of the world as we know it.

gdpetti's picture

Yes, as the song said.. 'as we know it'...

gdpetti's picture

Financialization is always the endgame of every empire before it gets 'reset'... we are there... Mother Nature is part of this normal cyclical 'reset'... every few centuries with small comet clusters... but the main cluster comes every ~3600 yrs... wipeout.... deal with it... only this time there's longer cycles showing up for the Grand Event sequence... dark star first, comets, etc, etc... our collapsing civiization is showing the same stress as the planet with all the EM affects of volcanoes, EQs, sinkholes as the crust slips, hail and lightning etc.... same curve getting steeper and steeper until it goes over the cliff. Our govt is showing the same instability... pushing the meme of fake revolution, same as always.... same group working behind the curtain... always the same script.

assistedliving's picture

Charles.  Have you not seen some of these AP/ internet start-ups?

MsCreant's picture

I am a professor. Folks at my rank, Instructors, Advisors, and others who interact with students are being "re-eduacted" regarding how to interact with our students. We are being told that they are all risk averse, thus we have to handle them differently.

I come into a classroom on the first day, guns blazing. Particularly if it is a required course, I let them know it is a weeder and the point is to weed them out. If they are good enough to earn (you heard me) EARN an A or a B, that means I am telling graduate coordinators across the United States, via their transcript, that this person is likely good enough to go on to graduate school.

Why tell you all that? Because they want us to be "nicer" to the students. The kind of thing I do, they would like to prevent. They are worried about them finishing and getting their degrees. They are worried about bottleneck courses that students can't pass and "retention." I will continue to do what I am doing (thank God we still have freedom regarding our course content) because it is good for them in so many ways. Students will tell me on the side that I am the first professor to ever challenge them and that they feel pride about having done well in my course. For all my "guns blazing" attitude I get excellent teaching reviews. 

They have studied it and go on the assumption that students are risk averse. And maybe they are when they step into my class. But when they leave many of them say they suspected college should be the way it is in my class, but that it just isn't happening on a regular basis for them. Bottom line, they may be risk averse, but that does not mean you need to cater to it. No risk, no reward. One reason for the contraction (besides the fact it is artifically propped up).

Seems to fit.

Said differently, they won't let failure happen anywhere (economy/education). It is a flaw in the culture. No one teaches about creative distruction and the fact that failing is learning and it is genuinely OK. Deconstruct the bad, free up resources for new ideas and people. Let nature sort it out.

govtsucks's picture

Students (and their parents) expect a degree because they're coughing up megabucks to attend. The main focus of college is no longer about learning. It is about purchasing a piece of paper that will presumably lead to a job.

itstippy's picture

Suppose I were a college Administrator, ultimately responsible for the financial success of the School Of Microbiology at the university.  I'm supposed to sign off on the graduation requirements for microbiology majors.  I need to know what are appropriate benchmarks for Microbiology undergrads.  I can:

A) Go see Ms. Creant and have her put together a list of basic achievement requirements for the Freshman, Sophmore, Junior, and Senior years.  She knows her shit and would get it right, quickly and accurately.  TOO RISKY!!!  We'd have paying enrollees failing to achieve the goals, and life would be miserable for all.

B) Form a team of instructors, councellors, financial aid experts, alumni, diversity coordinators, campus recruiters, and budget directors.  Assign them the task, and sign off on their recommendations.  PERFECT!  LOW RISK!  No ruffled feathers, everyone has input, etc.

You've got to think like an Administrator if you're ever going to be Department Chairperson, Ms. Creant.  That's why they make the big bucks. 

MsCreant's picture

I know better than to be chair. It is good for no one. 

And I have lived B, you are right, that is how education is getting watered down.

GreatUncle's picture

Starting to think risk aversion only has real meaning when you don't have a money tree?

We have a money tree so their is no risk aversion.

See a chainsaw act accordingly.

 

brushhog's picture

Im one of those "risk averse", its not an unfounded, mysterious, phenomenon. Im risk averse because my 45 years experience has taught me that opportunities to make money are extremely rare, practically nonexistent, and the opportunities to lose money are everywhere, all the time. There seems to be a relentless effort by everyone from neighbors, family, love interests, bankers, insurance companies, retail stores, services, and the government to part me from my assets.

Of course Americans are risk averse. That is normal, intelligent response to a world of shrinking opportunity and expanding cost. Wheres the jobs? Wheres the opportunities? "Risk averse" lol. You have to have a good chance of succeeding in your risky endeavor in order to justify taking it. Imagine going into a casino where all the games offer a million to one chance of winning even money...you'd find everyone there would also be "risk averse".