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Engineering the risk out of uncertain but high potential investments

Published on May 5, 2014 Reviewed on July 30, 2020   20 min

A selection of talks on Finance, Accounting & Economics

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0:00
Hi, there. This is Ian MacMillan from the Wharton School at the University of Pennsylvania. As you can see from the title, "Going for the Gold", I want to talk about investments which one can make, that despite their uncertainty have very high potential and are therefore very worthwhile provided that you can engineer the risk out of the uncertainty in that investment. There's a subset of uncertain investments where this is possible. This happens when people use a mindset that says, "I want to build in flexibility into my investment that allows me to stop at any stage if things look bad and extricate myself from the investment early on and at low cost".
0:46
To frame the talk, let's start with an observation that hardly a day or even an hour goes by without some author or speaker from the media relentlessly announcing that the word is getting more uncertain because of the turbulence of technology challenges, an increasing global competition, and other sort of yada, yada about global change. This is generally seen as something which is negative and difficult to cope with. But it is important to recognize that uncertain investment opportunity lurks, if you can engineer the risk out, because that means that you can capture the upside of a highly uncertain investment without exposing yourself to the downside. Not all uncertain projects have the property of being engineerable. But there are certain investments where you look at the investment opportunity with a particular mindset, you can see the chance to engineer the risk out, even although you will expose yourself to a degree of uncertainty. The important thing about this is that if you can begin to do this, and you have competitions that are more conservative, you can begin to take investments or positions which allow you to get much superior returns to them because they are trapped in a more conventional way of thinking about investment when faced with uncertainty. I must repeat, not all uncertain investments have the capacity to have the risk engineered. We're not talking about all uncertain investments by any means, but what we are looking at are situations in which if you feel clever enough about it, you can structure your pattern of investment infusions in such a way that you can engineer much of the risk out.

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Engineering the risk out of uncertain but high potential investments

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