Are you risk loving or risk averse? What would you rather choose; receive $1000,- with 100% certainty or receive $2.500 with 50% certainty? In our nature, most of us are risk averse and would choose option 1. Economically seen, this choice is inefficient as the expected value of option 2 is higher (0,5 x $2500,- = $1250,-). Often, humans are scared to take a risk given the uncertainties of that decision. We have seen the cryptocurrency market's BOOM in 2017 and many people that took the risk have seen enormous profits. What if we weren't that risk averse? Interested in your mind and decision-making behind investments? Read on!
"Just taking risks for risk's sake, that doesn't do it for me. I'm willing to take risks that I think are worth it, and I've worked so hard to make sure that I survive." Chris Hadfield
The choice whether to invest in cryptocurrencies brings uncertainties too. In this case, our human mind might tend to push us into an economically inefficient situation as the one described above. But why and how should we take this into account?
Fact 1: Losing an amount of money generates more pain than gaining that same amount of money
Assuming the situation discussed in the introduction, in a way, you'd expect yourself to have that $1000,-. It feels like you already posess it because it's offered as a certainty (100%)! If you choose option 2, it will feel like a big loss if you're left with $0,- in the end, probably even more than winning the $2500,-. For that reason, most of us tend to be risk averse and prefer the $1000,- because a loss is way more painful than the joy from an equal profit. An extreme case would be: imagine me offering you $10 million with a 100% certainty or $20 million with a 90% certainty? Which one would you choose? Think about that one and admit... losses hurt more than winning a same amount!
Fact 2: We prefer money today
If I ask you today: do you want to receive $1.000,- now or receive $1500,- in 5 years, what would you choose? Personally, I would choose option 1, I'm a poor student so that $1.000,- today is worth more to me than that $1500,- in 5 years! Future and uncertainties go hand in hand! Right now there are certain ways I can spend that money! In five years, I may have a good job and enough money already but it may also be that I'm sick or dead by then!? Unconsciously, we tend to prefer having that money today! Economists have even made a formula to compute the present value of future money: Here: Present value of money (PV) = Future Money / (1 + i)^n where i=interest rate and n=number of years from now (see figure below) But in reality I believe there are way more uncertainties that determine the present value of money. Think about expected inflation, life expectancy, current money stock and all other risks that come with your decision!
Taking Risks
The decision whether to invest in cryptocurrencies is related to both two facts stated above. You might prefer having your money today instead of waiting for it, right? It might also be that you're afraid of the uncertainties investments bring. But believe me, sometimes you have to take the risk. You will regret not investing if it eventually ends up to be worth a lot and you could've been one of those investors. Cryptocurrencies have a strong growth potential and with growth comes demand for cryptocurrencies. I've decided to invest, but how about you?
The decision is up to you, take that risk!
You might wonder what you can learn from this information? Well, often moments in life present certain situations as described above. Our risk averse human minds subconsciously push ourselves into inefficient situations in life. Situations which are safe and comfortable. Risks are all about uncertainty and the human mind is allergic to pain. Even in life situations when you might think about getting a new job, participate in a new sport or anything else that comes with a risk, our human minds are trying to protect us from pain and loss. We're often afraid of pain and rejection so often intend to choose the safe paths in life. But you must know, we are not afraid of the unknown, our projections of the unknown is what is terrifying. But are these projections true? The next time you're about to take a risk, take these facts into account and consider to take the risk! Only that way there's a potential for you to end up at the highest possible outcomes on Steemit, cryptocurrency investments and all other facets in life!
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