CHAPTER 8
Risk Tolerance
A PERSON’S ATTITUDE TOWARD RISK is as individual as his or her personality. Some people avoid risk at all costs—they put all their retirement savings into certificates of deposit insured by the federal government. Others embrace risk—they invest all their money in options, in penny stocks, in junk bonds. Most of us fall somewhere in between. We take on some degree of risk, knowing that it goes hand in hand with reward, but not so much that we can’t sleep at night.
How can you take your personal tolerance for risk into account in making decisions? We saw in the last chapter that choosing under uncertainty boils down to choosing among the risk profiles of your various alternatives. Once you’ve specified the risk profiles, ...
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