The RISK aversion of EGO

While reading a post about the asymmetric return potential of Steem by @dtrade, it reminded me of one of what I consider the key aspects of loss aversion.

For a quick recap:
In the post he looks at the scenario of investing 1000 dollars into Steem at 12.5 cents, meaning 8000 STEEM. If Steem goes to 1 dollar, it is a gain of 7000, if it goes to 10 dollars it is a gain of 79,000 dollars, if it goes to 20 dollars it is a gain of 159,000 dollars. From this point, at 20 dollars STEEM would need to see an increase of 160x and many people are "rather skeptical" if that is possible. This is the risk model that needs consideration.

But, risk aversion of investment is a tricky little animal in the human psyche I believe, as it hijacks hard-wiring that has been created for a different purpose. We are naturally risk averse, meaning we avoid danger, but this has evolved to protect us from things like walking along the edges of cliffs or, investigating what that growling sound in the bushes might be. It physically protects us. Increasingly however, this system is being used to include non-physical circumstances that do not put us in immediate danger, but can make us feel like we are.

When this comes to investing, I think that the aversion to loss (no one wants to lose) is more heavily influenced by the hard-wiring being applied to our ego than any actual risk. In @dtrade's example, the 1000 dollars for many who are looking at or are already investing into crypto is not a huge sum of money and is likely commonly spent on numerous other things that are not investments at all, like consumer goods.

But, once the #investing tag is applied, that 1000 dollars takes on a different context and the mental framework that is applied to buying a TV is removed and replaced with, this could cost me. Of course, the TV costs also, but that has a tangible result as the TV can be seen and held, something most investments can't be in the same sense. So, now that same 1000 gets treated as if it is not disposable income and instead something that is required, because the future value of it it is laden with expectation of outcome.

This introduces new types of fears for the 1000 dollars as not only would the investing take the money out of use for a period of time, there would also be nothing to show for it while gone and of course, if the investment turns sour. And I think the largest factor is the turning sour, which the ego would read as failure and we should know by now, we generally protect our ego as best we can, no matter how imaginary it is.

What I think this means is that when we look at investing, we need to understand not only the investment vehicle and risk model, we have to also understand our emotional state in the decision-making process. Is the far of the loss of 1000 dollars (or whatever amount) balanced with the actualization of that loss? What I mean is, are we applying too much weighting to the loss and too little to the investment itself?

Asymmetrical investment potential is what an investor is looking for, where the outcome is significantly higher than the input. Steem has an asymmetrical investment profile as even though it is risky, in an immature industry that looks to have high potential, getting in early is optimal.

Not only that, unlike most other investments, Steem can be "seen and held" as it can be actively used in various ways while still being invested. Not only that, the way it is used can not only change personal outcomes by increasing holdings, but also empower the value of STEEM itself by helping to build the ecosystem within that emerging industry.

Steem has another valuable model that most investments do not and that is, it is possible to earn the buy-in overtime through activities which in itself, add to the value proposition of the token. That is quite a unique model as it means that the future value is at least partially driven and tied to usage by those who invest themselves into it with time, effort, money.

Yet, we act according to our emotional selves and attachment to ego and instead of stepping back and looking at all of the factors, we react to how events and circumstances make us feel. We do and do not based on our self-perceptions and when it comes to investing, we protect ourselves under the guise of protecting our assets. The ego doesn't like failure, and a failed venture can hit it hard. However, an investment mindset that looks to invest broadly is going to have more failures than successes in the hope that the successes significantly cover the loss.

I see that this last part is going to be the process of Smart Media Tokens (SMTs) that will be built upon the Steem blockchain as they will allow for many attempts by many varied people with different ideas, skills and resources, and a lot of failure will arrive. However, there will also be some significant successes. As an investor into the STEEM token, I treat it like investing into an index fund of many business models where the average return will be greater than the loss.

But, that dynamic will be eventually transferred into the value of the STEEM token as the enabler, the platform, the infrastructure. This means that rather than being speculative, STEEM price will be tied to the success and failure of thousands of business models that will stabilize the coin and, hopefully slowly raise the floor as more and more opt-in to adding their value in some way to the Steem blockchain.

For me, the holdings of STEEM I have do not represent all of my investment into the blockchain or the future, but I do see the potential for STEEM to go well above the 20 mark as to do so, it only requires the entirety of Steem to be valued at 6.6B dollars, which sounds like a lot, but isn't considering that the valuation is made on trades and currently only 1/3 of it is liquid. Would you sell at 20? Perhaps. But, at that 20 dollars my vote value would also be 160x greater meaning that daily I would be distributing about 1000 dollars worth of votes a day.

It makes the game interesting at that point, doesn't it?

But, this is not investment advice, this is ego awareness. If we look at all the times we have held back in life because we fear judgment, ridicule or the inner feeling of failure - I wonder what it has cost us. When we are making our decisions, is it sense, or the ego talking?

Taraz
[ a Steem original ]