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.