DIFFERENT INVESTORS

2 Oct

I believe that old investor s may have a comparative advantage over young investors due to their experience within investing. As we know, it is impossible to predict the behavior of the market. Nevertheless, old investors could have a better understanding of the market following fluctuations, catastrophes, and any other events that may affect the market, and thus, will probably use different statistical models or variations. For example, older investors could be more aware of inflation than modest income ones because the latters haven´t really experienced it yet. In such situation, one could assume that younger investors will invest riskier.

Nonetheless, I would like to argue that now day’s young investors are probably very cautious about their investments. With the recent disruption in the financial markets, many investors are shrinking investment accounts. In other words, younger investors are more risk averse than older investors.

Furthermore, I also believe that very wealthy investors will bear more risk than modest income investors because their budget constraint and their indifference curves are higher than those of modest income investors.  Hence, wealthy investors could afford to invest risky, if they are willing to, because they have the money to afford any losses. In comparison, modest income investors will be more concerned about retaining and increasing profits by investing safe. Hence, they will use better statistical tools in order to spread out the risks.

Question of the week: I know there are different methods to calculate risk, one of them being volatility. What do you think is the best method to calculate the risks of a “worst-case scenario”?

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One Response to “DIFFERENT INVESTORS”

  1. shannon7774 October 13, 2011 at 12:49 PM #

    I think the best way to deal with the risk of a worst case scenario is to “Just do it” like the old Nike ad. If you are careful and consider the worst case scenario, then you will be more prepared in case a crisis hits. You might get lucky and never have to face that. But the time you put into planning in advance will be helpful.

    We will not talk at all about that in class! This is truly unfortunate. But the fact is that in the very simple scenarios we study in class, we always assume that the fluctuations are *continuous* in time, in fact we even assume that sigma is always finite (for simplicity we assume it is constant) which means that the variance has a derivative. That does not mean that the stock price is differentiable. It is not. But we do assume the stock prices are continuous. In fact, in worst case scenarios stock prices do jump discontinuously.

    I would refer to these as “nonlinear” effects because of an analogy to some ideas in physics. In a first course in physics you focus on purely elastic materials using springs and masses and partial differential equations like the wave equation. But you know that there are inelastic phenomena, like bending a metal until it breaks. That is what happens in bad scenarios in finance. I think that real human consideration has to be used for that. Not just automatic mathematical formulas. There are some things people are better at (than computers).

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