The Effect of Emotion on Risk Decisions

Posted November 25th, 2011 — Filed in Bud's Musings

Lately it has been brought to my attention that Ann has shut down her commodity futures business because of the M-F Global bankruptcy.  This posting isn’t about Ann it is about what is happening and how we should react to things that happen in the business world.

Bankruptcies happen in every industry from time to time and it doesn’t mean the end of that particular industry, only the end of that business. There have been many ranch bankruptcies over the years and yet ranching has survived.  What this should cause us to do is not quit but just understand what should be done before we invest money or time in something we know little about.

There is risk in any business and the amount of money put in any high risk business should equal the knowledge that we have about that business. Any money that is put in high risk situations should be money the person can afford to lose.  People put money in high risk situations they know very little about and then complain if they lose money.

In a perfect world there would be no risk, but in the real world there is some risk in everything. Every industry has some people who do things that should not be done, legal or otherwise, this doesn’t mean that the rest of the industry should or will cease to exist.  Actually the M-F Global bankruptcy may be a good thing as now it will get rid of M-F Global and bring people’s attention to some of the thing that were happening and allow or cause some firms to watch things closer.  Out of every bad thing that happens there are good things that come from it.

I say these things even though Eunice and I had money in M-F Global and may or may not get all of it back. This was the risk we took and was money we could afford to lose or it would not have been there.  We will keep trading as the industry is as sound as any industry and will last longer than the people who are complaining about it.

Remember, high risk things have the potential of large profits or large losses.