Jul

19

Fears, from J.T. Holley

July 19, 2007 |

 I think I've found a key to the "gun issues" that many people have. I really think it's a phobia or deep-rooted fear. The people that are the most avid anti-gun law supporters tend to be those who also can't stand being around guns, or even fear them. It's like there is a snake in the room. Even if the gun is not loaded they fear it. It could have a trigger lock, be shelved or encased, and they still get jittery.

Is it similar to those that are afraid of heights? It's not being high up that makes them scared, it's the thought of actually being compelled to jump. Equally with guns, just because a rifle or pistol is in the room doesn't mean it's going to go off. Is it really the fear that they can't hold themselves back from picking it up and discharging it? If so, why would they think it has to be aimed at a person? The statistics behind such an event's taking place are way to the left tail.

Similarly with the markets and speculation. "Don't trade options or any other derivatives because they're too risky!" I understand risk. Why would people say that? Is it because they fear it themselves and to actually own something in that category would cause them great angst? Is it more that they lost money when they tried? Is that why there is always a great pull for the pessimistic to be in hard assets such as gold, timber, real estate?

Adam Nelson replies:

With derivatives it is the leverage that causes many people to fear them. Also, they are more complicated — you have to understand not only the movements of the underlying but also the relationship between the underlying and the derivative.

The fear arises from a lack of understanding of how they work and what they do. If all someone knew about guns were knowledge obtained from the media, it’s entirely likely he would have a very different impression of what they do and how they operate than that of someone who shoots regularly. Also, the stories about derivatives are almost always about a fund's blowing up often due to its exposure being larger than expected or misunderstood. If the only knowledge one had of derivatives were stories from tail events, it would likely skew the risk profile a bit.

I agree on the hard asset exposures and have no explanation for why pessimists prefer them (especially gold).


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