WHY FEWER ARE TAKING SMART RISKS
The question is why. One theory is that too many “good” risks – such as getting married, starting a family or buying a house – are too expensive. If people feel shut out of productive risk-taking, maybe they bet on sports or meme stocks instead.
But previous generations had even less money, and they still managed to achieve these life milestones. Besides, just because someone can’t afford to buy a house doesn’t mean they can’t take a healthy financial risk. How about investing in an index fund?
Another theory is that people are encouraged to take fewer smart risks by social media. To be fair, betting on a sports game is more fun than index investing, and (usually) more dramatic. Policy also contributes, as governments underregulate sports gambling and overregulate housing, making it easy to bet but hard to move.
Finally, it’s important not to downplay the role of personal experience. This is a generation that took fewer risks as children and so may be less skilled in risk-taking than their parents.
Financial literacy is not just about knowing what compound interest is – it is also understanding why some assets promise higher returns than others. Often it is because they are riskier.
The economy feels frenetic, and markets feel frothy, because they are in that part of the cycle when people take more outlandish bets. This cyclical nature is nothing new; it is hard to argue these are uniquely risky times. But they are made worse by the presence of so many unskilled risk takers. And a crash will come – maybe not tomorrow, maybe not next year, but someday.
The question then will be how the economy recovers. Because while crashes and corrections are a constant, human resiliency varies. With more widely available social insurance and greater wealth, more Americans are better able to handle setbacks than ever before. But will the problem gamblers get the help they need?