Wealth And Risk-Taking

June 7, 2011 10:50 am

Here is a classic Round-Trip Fallacy. From the WSJ:

“Do the wealthy take more risks because they are wealthy, or are they wealthy because they take more risks?

Both might be true. Yet a new study suggests that larger wealth may be more of a cause of risk-taking than a result. The study, by Barclays Wealth, polled people with $1.5 million or more in investible assets. It found that those with $15 million or more in wealth were more likely than the lesser millionaires to agree with the statement that “I buy and sell investments more than I should.”

They also were more likely than those with $1.5 million or more to agree with the statement that “to do well in financial markets you have to buy and sell often,” and that “I attempt to strategically time the market as opposed to adopting a buy and hold strategy.”

Statistics Source: WSJ

So the flaw is obvious. It will be helpful for us to revisit the definition of Round-Trip Fallacy:

The Round-trip Fallacy. This is the confusion of absence of evidence that unexpected, high impact events (Black Swans) have occurred, or will occur, with evidence of absence of such events (no possible Black Swans). (p. 310) For example, there is an absence of evidence, that al-Qaeda has successfully established terrorist cells in Washington, DC, at the moment. But it would be erroneous to infer that there is evidence of the absence of all such events. As NNT points out (p. 54), post- cancer treatment absence of evidence from body scans that cancer remains in the body, is not equivalent to evidence of the absence of all such cancer cells.

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