The Hindu Business Line : <I>Game of uncertainty </I>

One of our friends commutes to work by bus. He catches the bus at 8 a.m. Sometimes, he arrives at the bus stop two-three minutes past eight. If the bus does not arrive within five minutes, he knows that he has missed the 8 a.m. bus. He feels bad about it but argues that he feels worse when he sees the bus leave as he is walking round the corner from his house to the bus stop. How is his behaviour related to economics?

We behave in a similar manner when faced with a sure loss and an uncertain outcome. Suppose you can win Rs 5,000 if you correctly call a tossed coin. You risk losing Rs 7,500 if you call the toss wrong. If do not wish to call, you will have to pay Rs 1,000. Which would you prefer?

If you are rational, you would choose to call the tossed coin. Why? You can win Rs 5,000. Opting out of the game would cost you Rs 1,000. You would rather try your luck at the game.

Our friend's behaviour is no different. When he sees the bus leave the stop from the corner of his house, he knows that he would be late for work.

When he is late and unsure as to whether he has missed the bus, there is a small chance that the bus would be late too! The small possibility of still catching the bus is better than the certainty of missing it.

It is the same with investments. You would prefer an investment that provides possibility of profits rather than one that is sure to give you a loss. Uncertainty provides the spice to enjoy life!

(The author is Chennai-based financial analyst.)

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