TheUnemploymentDojo's Blog

Risk,Uncertainty,Modeling and Hedging.

Posted on: June 13, 2013

Risk is known uncertainty unknown. Whether we know it or we don’t we are always operating under a model. A model is nothing but a set of rules and principles that govern our behavior. Emotional,financial or even spiritual we operate through a model. Modelling in lay man terms is where we receive an input, process the data through our internal beliefs,emotions and experiences and design our behavior in response to the input. This happens with or without our consciousness. Now here is where training comes in.

The purpose of training is to sensitize our inputs to external stimuli such that when faced with a situation, thinking is negated and action takes precedence.

To clarify the above statement say you have income and from previous experiences, you know that at one point in your life a mishap is going to happen so you start “hedging” in preparation for that rainy day. That is called “buffering” for risk. Risk is known. You know something is going to happen, car will breakdown, house will catch on fire from one of your kids watching a movie and thinking they can be heroic(maybe not that extreme!) maybe a divorce, maybe a marriage even maybe a newborn…..so we hedge! That is known.

Now what if you have uncertainty inputs? These are events that you have absolutely no idea that they will happen……or you had sensitized your model incorrectly and the very exact opposite happened! For example investments tied up in homes which was sound until the 2000’s! There was an expected ROI of 13% per annum!  Infact a survey commissioned by Case and Schiller in 2003 found that from 1896 to 1996 adjusted for inflation houses on average rose by a mere 0.06%. Then in 2000 the bubble added to even greater uncertainty.

I am not an investment broker BUT one thing i understand is modeling. Warren Buffet once said “When the markets are greedy invest fearfully and when the markets are fearful invest greedily” which is not bad advice and we can take it up a notch. RULE 101 : If you don’t understand an investment don’t put your money there at all! I have no business playing with the stock market unless i understand it. Unless i understand supply,demand, calls and puts,S&P and DOW Jones i have no business putting good earned money in there. Even if the markets are flouring right now! I learned that before you invest in anything you need to thoroughly do your due diligence. Heck, use the finest free invention created by the smart duo with Phd’s called “google”! That’s a start!

Investments just like modeling is nothing but an extension of our internal mindsets, experiences and emotions. So rather than invest energy in finding strategies and tricks and the next fad, maybe you should invest time in building a strong internal foundation! Remember this if you don’t remember anything at all, investments are nothing but a reflection of our internal states to external stimuli.! Failure is inevitable but before you play, learn the game…then become a player while hedging  for a downfall…it is not negative thinking…it’s eliminating naivety.

Have a wonderful day!

Lee Kariuki

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2 Responses to "Risk,Uncertainty,Modeling and Hedging."

Wow that was strange. I just wrote an very long comment but after I clicked submit
my comment didn’t show up. Grrrr… well I’m not writing all that
over again. Regardless, just wanted to say excellent
blog!

Your Welcome……and thank you.

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Lee Kariuki
1-888-MY-ETHER ext. 04466282

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