Risk and Getting it wrong

Its easy to be set back by failure. The best strategy is to shake off failure and not be put off. For some reason this is counter interintuitive though which is why we get confused.

In an article in Moneycontrol.com 20/11/06, Rakesh Jhunjhunwala argues exactly this that taking risks is against human nature.

We tend to minimise loses instead of maximise winnings. That is we try to avoid defeat, rather than try to gain the most. Thus we may miss many risky opportunities as we try to avoid defeat, which had we played them would have on balance of probabilities earned us more through the array of wins and failures than just backing the dead certainties.

George Soros is quoted as saying, being right or wrong is not the issue, it is rather how much you lose when you are wrong and how much you win when you are right that counts.


As a zoologist I am familiar with this type of thinking from analysing animal strategies. If there is one inter-disciplinary subject that should exist it is animal behaviour and economics!

In optimal foraging it ius assumed that the winning strategy (i.e. the one that selected for and therefore evolves) is the one which maximises energy and thereby offspring. What strategies exist to maximise energy in an unpredictable environment? That is the strategy.

When certain factors like "thinking time" or "handling time" (where the time it takes to determine the type of prey and therefore the way to attack it and eat it) are introduced into models, a remarkable accurate prediction of many behaviours arises based upon the hypothesis that animals maximise energy consumption, rather than minimise loss. So the dominant strategy in many environments is to go "all out", taking risks and suffering the losses because overall the wins are greater.

Why have humans not learned this? Maybe it is to do with aspects of social status and psychology. Being a "loser" has a special meaning in humans, far beyond the practical aspect of having little resources. We try to look like "winners" and so we don't take risks to avoid looking like losers. Reputation means a lot. Traders want to look like winners so they attract interest, even though that strategy may mean overall they win less than their competitors who have a lots of losses as well.