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Elements For The Judgment Finance Essay

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Date added: 17-06-26


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Voluntary risks are considered less troublesome than involuntary risks. One of the biggest arguments for it is that people tend to use tobacco irrespective of its known risks while in case of plane crash, public reaction is exceptionally high. In the same way risk perception of an expert and layman is very different.

Starr characterized risks into voluntary & involuntary. Voluntary risk is the risks in which participant or the risk taker takes risk by choice. When an individual takes risk by its choice it is more acceptable for him it is because of the reason that voluntary risk is takes by the individuals own value system & experience. While involuntary risks are associated with such activities or situations which are not taken by the choice of the individual rather it is imposed on him without his consent. Starr found out that individual tend to accept those risks with are attributed with benefits hence he termed those risks with voluntary risks. Starr did an extensive research on that & concluded that people tend to accept voluntary risk 1000 times more than involuntary risk (Starr, 1969).

According to renn (Renn, 1990)individual perception of risk is more satisfying it he chooses the risk voluntary instead of the risk which has been imposed on him. Individuals accept voluntary risk more than involuntary because it gives them a sense of freedom hence voluntary risk is often attributed as chosen risk because when people perceive that specific form of investment yield higher returns they chose & accept high risk. Secondly individuals take voluntary risks because they have relevant knowledge & information available to them i.e. They have more knowledge & information about any form of investment than the other whereas lack of information provides a legitimate case for not involuntary risk because with lack of information or knowledge about the risk can be costly for people to avoid. Another approach leading to voluntary risks is presence of alternatives i.e. when an investor rejects less attractive alternatives he is going for a chosen risk which he thinks is most acceptable for him (Wang, 2009).

Financial knowledge of the investor may influence a wide range of behaviors like voluntary participation of risk & his choice of portfolio. It also helps in determining whether the person is certain or uncertain about a risk. Certainty itself is a psychological construct; if a person has a complete knowledge then he will not have any uncertainty towards a risk (Sjöberg, 2004)

And if you are uncertain about a risk, uncertainty itself is perceived as a risk.

Financial knowledge is a knowledge that is learned, organized & is represented to make reasonable decisions about their investment plans or choice of investment portfolio they want to make i.e. whether highly risky or less risky. Investors have to update their knowledge to make better investment plans. Research indicates that there are two types of financial knowledge: objective knowledge & subjective knowledge. Objective knowledge includes the financial knowledge which investor possess & the updating of that knowledge via effective deliberation. While the subjective knowledge is the knowledge which investor interpret him based on his personal experience. For the purpose of validity, objective knowledge is considered more valid than subjective knowledge although for reliability purpose many investors rely on their subjective knowledge as it represents how confident an investors is towards his choice of investment decision (Steel, 2002).

In traditional economies people tend to make their investment funds based on the benefits associated with them only while in today's economy with the inclusion of financial management people take decisions based on their own ultimate benefits by choosing between a mix of defined benefits investment plans & undefined benefits investment plans. People tend to accept those risks more which have clear benefits in comparison to those who have little or no benefits. But it is to be kept in mind that if an investor wants to have a higher return, he must bear a higher risk i.e. higher the risk higher will be the return on his investment. It is because of this reason that investors have been classified as risk taker & risk averse, high risk taking investors clearly do not take higher risk for the sake of risk itself but because the monetary & other clear benefits associated with those risks. For an investor determined a clear reward associated with a risk, he voluntarily accepts even very high risk. While choosing between different alternatives or having a diversified portfolio involves choosing between perceived risk-benefits combinations (Sachse, 2012)

Basic investors do not consider growth securities firstly because of their fluctuating nature as it is only suitable for investors who look for capital gains over the long term and are willing to take high risk, secondly although it ensures ownership in the company, whose shares have been bought, but in case company liquidity shareholders claims are fulfilled in the last. For this reason, investment in shares is usually done by investors who are high risk takers.

Investors who are low risk takers choose risk free securities such as Government securities which has fixed rate of return over a long term period. As these securities incorporate fixed rate of return hence they are free from any uncertainty. Hence mostly low or moderate risk takers invest in such securities (Diacon, 2002).

control

Risk factors that can be controlled by the individual himself are considered as controllable risks as they can be controlled with one's behavior e.g. by avoiding smoking one can avoid the risk of getting cancer.

Not all type of risks can be controlled or changed by the individual, such risks are known as uncontrollable risks e.g. heredity diseases cannot be prevented by one's own will, similarly no one can change or control the obvious diseases resulting from old age while in some cases like in investment decisions one can protect himself from huge losses by doing risk assessment first (Groth, 2004).

From an organizational point of view controllable risks are the internal risks that can be changed, controlled, avoided or even eliminated e.g. monitoring employee's behavior on regular basis to avoid any illegal action that can cause loss to the company. Whether a company or individual controllable risks for both is best managed through prevention i.e. by actively monitoring operational processes, their investment portfolios, their decision behaviors etc. for this reason controllable risks are also called preventable risks. Some risks arise from such events which cannot be controlled, prevented or monitored to be influenced. Natural & political disasters in a country effects all the sectors of that country & hence they can only be identified by cannot be controlled e.g. world recession of 1930 hit every financial sector very badly but this recession couldn't be controlled due to some reasons although they were mitigated but not fully prevented. These risks are uncontrollable risks & are also known as external risks (Kaplan, 2012).

Risks can be controllable or uncountable, price fluctuations in commodity prices is generally not considered controllable due to some of the market factors which cannot b controlled although it can be mitigated by increasing or decreasing one's exposure to the risk e.g. if a lay man wants to invest in the business he can mitigate the risks by hiring a broker for himself instead of doing investments on his own (Fragnière, 2007).

If people tend to perceive that they have control over the risks associated with their investments then such risks are more acceptable for an investor or they are more willing to take such risks. An individual tends to have a control over the risks of its investment if he can mitigate or eliminate the risks. While controllability can also be confused with illusion of control in which individual tend to consider his perceive risk lower than actual because they think they have control over their investment risks, while in actual they don't. Because of these factors investors tend to take high risk investment products, rather they are more willing to accept greater risk than others hence controllable risks are classified as those risks which we can influence or mitigate, while uncontrollable risk factors are those which cannot be influenced (Doss, 2012).

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