- As humans, typically we don't like risk.
Now, there are counterexamples.
Extreme sports people and Himalayan
mountain climbers seem to seek out risk.
But most humans don't like risk,
particularly in their everyday lives.
That's why we have such things as health insurance
and life insurance.
The key point is this, people typically
need to be paid to get them to accept risk.
I might accept more risk if you pay me more.
Let's take some examples from business.
For example, if you go down to your friendly
neighborhood bank and invest money
in a savings account that's insured
in United States by the FDIC,
you can expect a return of less than 1%.
Why such a low return?
There's low risk.
If you elect to invest in a corporate bond,
you can expect a return of about 4%.
Why a higher return?
It's more risky.
It's not guaranteed by the government.
If you elect to invest in a stock index fund,
you can expect an average return of about 10%.
Why so much higher?
Because it's a lot more risky.
That index fund could go up if the market goes up,
but it could go down if the market goes down.
Remember this key point,
in order to get me to accept more risk,
you're going to need to entice me
with higher expected returns.