This document discusses an exercise where participants make a series of investment decisions based on different scenarios involving levels of risk. In the first scenario, most participants required a past success rate of between 65-80% before investing. When it was revealed the investment was oversubscribed, most lowered their required success rate. Finally, when participants learned their child needed an expensive medical treatment, most further lowered the success rate they required before investing, showing how risk tolerance changes based on new information and circumstances. The exercise demonstrates how perceptions of risk are influenced by multiple real-world factors.

1. Useful tips on how to get risk fit
Risk is influenced by people’s perceptions and decission-
making
GREGG BARRETT
I N MY recent journey through the IACCM Managed Learning programme
(www.iaccm.com), I was exposed to a very interesting exercise that participants are required
to participate in. The exercise covers risk, people’s perceptions of it and its impact on
decision making. With risk so high on the corporate agenda such exercises are interesting and
extremely valuable.
To appreciate just how people adjust their views on risk based on changes in information and
circumstance, let me take you through the exercise and how people responded.
The situation:
You have a friend who is a wealthy entrepreneur. She has made a lot of money through
successful new ventures and business initiatives. You know she has also made many of her
family and friends wealthy who invested in her schemes.
She writes to tell you that she has identified a new opportunity and is seeking investors for it.
She is making this offer to only 100 people and needs each of them to invest a minimum of
R200 000 raising at least R20 million in total. She will be investing R5 million of her
own money and will only proceed – and draw on your investment – if she reaches the total of
R25 million that is required.
She estimates that your return from this investment will be at least R1 million and that this
will be achieved in two years.
The problem is, you do not have easy access to R200 000. Your only significant asset is
your house, which is worth about R350 000 and you have an existing home loan of nearly
R100 000. So you would have to raise money by borrowing against your house as security
Decision point One:
You consult two friends – one is an accountant, the other a lawyer. You ask if they could
check out your friend and the success rate of her past ventures. They tell you several days
later that she appears to be very honest.
Would you make this investment if they told you that:
a) Less than 50% of past ventures have been successful
b) Between 50% and 65% have been successful
c) Between 65% and 80% have been successful
d) More than 80% have been successful

2. e) I will not invest under any circumstances or unless there is an absolute commitment to
getting my money back
What people answered:
a) 1%
b) 2%
c) 12%
d) 36%
e) 48%
Decision point 1 is designed to illustrate the significant variations in our personal attitudes to
risk – our propensity to accept risk.
Decision point Two:
There are now two days to go before the offer closes. You learn that it is significantly
oversubscribed and many people decided to invest more than the minimum amount. This
does not affect your ability to invest nor does it change the rate of forecast return. You know
some of those who have decided to offer a higher investment are respected and seasoned
business people.
Based on this new information, confirm the level of past success you require to make this
investment:
a) Less than 50% of past ventures have been successful
b) Between 50% and 65% have been successful
c) Between 65% and 80% have been successful
d) More than 80% have been successful
e) I will not invest under any circumstances or unless there is an absolute commitment to
getting my money back
What people answered:
a) 1%
b) 5%
c) 19%
d) 36%
e) 38%
In this scenario you learn the offering is over-subscribed. This has no real bearing on the
level of risk. It is similar to the herd instinct that led to mass investment in internet stocks or
similar “mass” activities. The fear is that you will be left out and reputational risk takes over
from sound judgment.
Decision point Three
There is something else you should know. Your five- year-old son has just been diagnosed
with a rare disease. It is not immediately life-threatening but he is likely to become
permanently and severely disabled unless he is treated in three years. The treatment is

3. expensive and will not be fully covered by your health plan. If your son is treated, the
chances of a full recovery are almost 100%, if he is not, the probability of disablement is
more than 90%. To get the treatment, you must somehow raise at least R750 000 in the next
three years.
Based on this new information, confirm the level of past success you require to make this
investment:
a) Less than 50% of past ventures have been successful
b) Between 50% and 65% have been successful
c) Between 65% and 80% have been successful
d) More than 80% have been successful
e) I will not invest under any circumstances or unless there is an absolute commitment to
getting my money back
What people answered:
a) 8%
b) 11%
c) 17%
d) 28%
e) 36%
In this scenario, your son is entered into the equation. The logic here is that those in a low-
risk situation should increase their risk position. You have no other way to raise the money
you need.
This offers a higher probability than anything else to get hold of the R500 000 that you need
to supplement your existing home equity. Next week I will cover the remaining two decision
points in the exercise and what my responses were. Interestingly, a number of organisations
have moved towards such exercises in staff screening for positions and to assess decision-
making competence and risk tolerance. The results of such exercises have also been
supplemented with real world outcomes.
The results and models that have originated from such exercises are beyond the scope of this
article but provide for an interesting study.
TAKING A RISK . . . People often adjust their views and opinions on risk based on changes in
information and circumstance