Sunday, October 16, 2016

Post 7: Risk Preference

My future income risk management during my undergraduate years has had its ups and downs. As someone who will be receiving a B.A. in Economics, the subject matter of my major is applicable to a wide variety of jobs in the business world. However, when one looks at the major divisions of business practice -- e.g., finance, accounting, marketing and sales, and administration -- the classes in the Economics Department, while generally tangential in some way to all of them, do not prepare students particularly well for any one of them. In other words, a B.A. in Economics is broadly applicable but unspecialized. If preparing for jobs in the business world is looked at in terms of investment strategies, time spent on classes could be looked at as funds invested and preparedness for jobs could be looked at as the return. In this case, pursuing an Economics degree could be compared to a diversification investment strategy, in which time is invested in independent assets, or types of business jobs, in the hope of not losing a significant amount of money from any particular asset going through a rough time in the market. This should lead to consistent returns that are close to the market average. A quick look at statistics in the public domain will show that Economics degrees do, indeed, allow for average starting salaries at or above the average for those of other degrees pertaining to business. Because of this, I consider investing in an Economics degree to have been overall a good decision that led to lower income risk. This analogy is more applicable to diversification than to hedging because different types of business jobs can encounter a good market at the same time.
            Student loan debt is another important factor in preparing for life after undergrad. As was said recently in class, higher operating costs mean a higher amount of revenue is needed to achieve a given profit level than when operating costs are lower. In this case, less money to be paid to student loans will mean more money left for one's consumer spending (the "profit"). Effectively, lower student loan costs can mean a lower income risk ceteris parabus. I have been fortunate enough to have parents that kept my income risk very low on this front. Student loan debt is one area where future income risk is highly determined by luck, although less fortunate students can find some alternatives ways to decrease income risk, such as through scholarships or military service.
            Summer and extracurricular activities are where my income risk preference has been for higher risk in exchange for more immediate returns in terms of enjoyment. My only internship experience has been several months this past summer spent helping to review charitable services contracts and organize administrative records for Boat People, SOS, a not-for-profit dedicated to helping underprivileged Vietnamese-Americans. While this has given me some relevant business experience and connections, there has definitely been an opportunity cost to choosing not to start finding internships earlier. Pertaining to my extracurricular activities, I am a member of a service fraternity, where I have chosen to spend more time helping other members develop leadership and professional skills than on the actual service component, and I am also a member of the Illini Statistics Club. While both have given me relevant leadership experience and opportunities to practice professional skills such as communicating in a professional environment, I have not had many opportunities to make relevant business connections as a member of those organizations. Such connections could have helped further lower my future income risk by giving me a greater chance of making an average or above average salary through pathways to good job opportunities. This is where the opportunity cost of my choices on this front lies. However, I have had more fun and free time during my undergraduate years as a result of that tolerance for risk in the usage of my undergraduate time, since that tolerance led me to pursue activities I found more enjoyable over more "boring" but useful ones. This aspect of my risk management has shown me a possible connection between high risk preference and opportunity cost, which can tie the two parts of our course together.

            The most easily accessible person to me that has already been through the job market has been my father, who started his undergraduate experience as a chemistry major but switched to accounting partway through. During his freshman year of college, my father managed his income risk with the return of a good job as a chemist in mind, taking relevant chemistry courses and joining chemistry clubs. However, over the summer of his freshman year several chemical plants closed down in his area which led to him realizing that, due to the unreliable job market for chemistry, a chemistry career will inherently have a higher income risk than a career in say, accounting. Realizing that chemistry did not line up with his preference for low risk, he started managing his income risk with the goal of a career in accounting in mind, taking accounting classes and internships while working to make connections in the accounting field. In my father's view, a given investment of effort in an accounting career inherently carries a lower risk than the same investment of effort into chemistry. In other words, choosing to switch career paths was a major part of my father's income risk management. As he found an accounting job soon after graduating, this risk management paid off. My take away from this is that, when evaluating risk, one should look at the industry they are investing their resources in and see how returns in that industry are comparing with returns on similar investments in other industries. If it looks like risk will be significantly reduced by simply investing the same amount in another industry, one should consider making a change. I can see this happening in real life by looking at how well the biotechnology and healthcare industries have been faring in the wake of the recent recession. I believe the success in those industries is partly because people have been more willing to invest in those sectors because of the relatively inelastic demand for their products which leads to consistent returns.

3 comments:

  1. You told an interesting story about your father, but I don't think you fully internalized the lesson, since you seem to be focused on that first job after graduation. Suppose your dad actually graduated 5 years earlier, so got that Chemistry degree and a job in the industry but then got laid off when the downturn came. After that he decided to go back to school to study accounting. In that hypothetical the switch happens later in life, not in college. Does that matter? If so, have you readied yourself for possible switches down the road?

    It is possible to make a living in the not-for-profit sector doing charity work, but your income aspirations probably have to adjust to that and you almost surely have to love what you are doing and/or believe fully in the mission. I don't know enough about you to say whether that is a career possibility for you or not. In my day, idealistic students might enter the Peace Corps or participate in Volunteers In Service Towards America. I have some regrets for not doing that myself and instead going straight through to graduate school. But, I also know I was pretty nerdy and not very adaptable to the world outside of school. So I'm not sure whether I would have been able to cut it that way. In your case, it is perhaps something to try. I don't know the implications of doing something like that and servicing your student loans. If that can be managed, and you don't yet feel ready to enter the rat race, it seems worth a try.

    The world changes rather dramatically in this regard when you have others who are dependent on your own income generation. Without such dependency, you have greater freedom to explore some of these alternatives. That thought should also enter the equation.

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    Replies
    1. I think that the switch happening in college vs happening later in life does matter, as switching later in life would mean that my father would have likely been paying for two college degrees instead of one. Also, I believe that, as one gets more established in a certain career path, the opportunity cost of making a switch rises. I think my take away from this particular thinking will be that if I am truly tempted to switch career paths, I should consider making the jump sooner rather than later. Although I should balance this with acknowledging that all careers have ups and downs, and sometimes simply working hard and being patient will allow me to make a better situation for myself in the career path I am already on. Unfortunately, I am not sure how I might ready myself for possible switches down the road, as there is no way to predict what other career paths I might become interested in or when I might become interested in them. I would be open to any suggestions on how I might prepare for such a switch, though.

      Pertaining to the idea of working in the not-for-profit sector, it seems to be very possible to make a good living for yourself there with hard work. I know several people that have found work there and their standard of living seems to be about the same as the people I know that went into the for-profit sector. I do wonder if this will hold out over time, though. Also, from what I have seen, spending your early career in the not-for-profit world is not a commitment to do so for the rest of your career. I know several people that completed internships at not-for-profits after college before finding work at a for-profit company a year or two later. I'm not sure if I would be interested in the Peace Corps, though. I will have to spend some time considering all of my options.

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    2. I think that the switch happening in college vs happening later in life does matter, as switching later in life would mean that my father would have likely been paying for two college degrees instead of one. Also, I believe that, as one gets more established in a certain career path, the opportunity cost of making a switch rises. I think my take away from this particular thinking will be that if I am truly tempted to switch career paths, I should consider making the jump sooner rather than later. Although I should balance this with acknowledging that all careers have ups and downs, and sometimes simply working hard and being patient will allow me to make a better situation for myself in the career path I am already on. Unfortunately, I am not sure how I might ready myself for possible switches down the road, as there is no way to predict what other career paths I might become interested in or when I might become interested in them. I would be open to any suggestions on how I might prepare for such a switch, though.

      Pertaining to the idea of working in the not-for-profit sector, it seems to be very possible to make a good living for yourself there with hard work. I know several people that have found work there and their standard of living seems to be about the same as the people I know that went into the for-profit sector. I do wonder if this will hold out over time, though. Also, from what I have seen, spending your early career in the not-for-profit world is not a commitment to do so for the rest of your career. I know several people that completed internships at not-for-profits after college before finding work at a for-profit company a year or two later. I'm not sure if I would be interested in the Peace Corps, though. I will have to spend some time considering all of my options.

      Delete