Most individuals are averse to risk, at least downside risk. But not all downside risks truly matter. If you drop your iPhone on the concrete pavement and the screen cracks, you will obviously get upset. Yet the incident probably does not have a real consequence for your financial health. In contrast, if the stock market collapses, your investment might take a hit that forces you to change your life, for example, by delaying retirement or constraining leisure activities. Some individuals might even lose their jobs and spiral into credit card debt and payday loans, leading to chronic poverty.
In some cases, we can readily and cheaply reduce the downside risk to our financial health. But in other cases, reducing ...
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