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Elements For The Judgment Finance

Essay
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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 (Sjberg, 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 riskbenefits 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 (Fragnire, 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).