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Tanzania Daily News (Dar es Salaam)
By: Dr. Hilderbrand Shayo
HOW much risk a project promoter or financier could tolerate when gauging an investment whether short-term or long-term has been debated.
And debate to determine what risk level is acceptable between the lender and loan enquirer will continue to be a centre of discussion among financial architects.
Market risk such as the volatility or markets-up and down, transmits to the continued discussion about amount of risk tolerance any lender is prepared to take.
Conventionally, financial planners, time and again use risk tolerance to categorize investors and financing level styles.
Once both parties, for instance, project promoter on one hand, and financier on the other, comprehend how much market risk can be tolerated, building a portfolio that is suitable for that kind of risk tolerance can be instigated.
Project underwriters seeking finances from financial institutions, specifically those institutions that provide long-term loans, sporadically overlook risk features, labouring such starring role to lending side.
Understanding the assessment of investors risk broadmindedness is a central step in crafting any investment strategy, although advisers and academics approach it different ways.
Academic economists involved in aiding project promoters to prepare project writes ups and business case lack real-world understanding of how market operates, hence use mathematical assumptions to model risk aversion.
Although these assumptions are attractive to them in part because they can be used in models, reality on the ground is different.
Real-world business environment sometimes attests modelling wrong because even though can be verified empirically on the paper, on the ground doesn’t work.
That is why; developmental finances will always stress the importance of loss aversion rather than risk aversion, and the unevenness of reactions between losses and gains.
Investment managers have for a long time used questionnaires to categories their client loan submission by their attitude to risk-taking. These questionnaires for example scrutinize age, family history, income trend, wealth sources, expenditure plan etc. as well as their attitude to risk.
Whilst these features sound good, lack of blending these aspects with real world on the ground could create a ground on poor performing of projects once loaned.
Repeatedly, questions posed by inexperienced investment managers about risk may use language and concepts that are unfamiliar to non-experts thinking all aspects to ascertain risks are shielded.
I stand to be corrected, but through experience, people who are not familiar with investment often miss the mark to fish out the main elements in the initial cost estimate for a project as well as swotting some of the many factors which lead to changes to the original assessment.
Consequence of not understanding real-world is errors and systematic bias that make investment advisors to appear to be more tolerant of risk than their clients.
For such reasons, conservative risk questionnaires may be unsuccessful standard criteria for assessing promoters seeking loans for their project’s undertakings.
How much risk can an individual endure in any enterprise has been changing and financiers and shareholders considering to invest are required to be ahead of lending game.
In contemporary years, a number of psychometric risk profiling services have developed, typically in interacting with architects on the ground aiming to minimise losses.
Online investment assessment is gradually gaining ground; nevertheless, fears are likewise raised about its precision.
Relying on online investment web-based automated advisors when assessing client’s project risk is beginning to outshine real-world risk assessment that need to assess the appropriateness of clients and specific risks for different investment products, with little or no direct interaction with those clients before taking up loan decision is thru. Much as online investment approach is being preferred to get away with human error, it is vital to remember garbage in garbage out.
The type of data laboured to the system is critical. Providing inconsistent responses related to data input, may call for human invention. Human innovation in assessing risk tolerance suggest that investment consultants may think it is rational to take more risk than most people would wish, not because they have a better understanding of investment risk, but because their nature is to enjoy the proximity to volatile markets.
An online investment service to support ascertains risk tolerance level especially in our business environment, where data sources and data correctness is at all times in question, has a limit when used to gauge risk levels for long-term investment horizon.
For instance, a single tally on a risk-tolerance data input, to even a well-designed structure, will not be an adequate guide to an investor’s willingness take risk.
In ascertaining investment risk, at all times you will come across things like there is no one-size-fits-all method when it comes to investment risk.
Because of such interpretations, risk tolerance will continue to depend on a variety of aspects, comprising age, personality, character, market segment and above all why investing aware of certain prevailing risks.
In determining why investing, the smartness of connexon in decision making is one of the most imperative things that venture capitalist need to resolve.
How hands-on or hands-off do these project sponsors wish to be, and what are their preferences and special areas of investment could be mitigated to minimize future losses.
Why? In business, threat absorbing, the engine driving investment, is important to enterprises seeking market success and increasing their market shares.
Risks in these undertakings are, however, often thought of only as exposures; despite the fact that they can present substantial prospects and potentials for managerial innovation and new competitive advantage leading to short- and long-term business’s profitability.
For industrialist, managing hazardous investment risk has been more and more recognized as a critical business issue. Thus why, for any investor of any level considering risk tolerance level should ask question such as do my abilities and specific expertise translate to new market segment I am looking to invest or looking to give credit?
Opinions articulated here take cognizant that one of the most disputed questions in the field of finance and getting on investing project literature is whether there is any set of factors that differentiates among investors and organizes risks into different categories in terms of financial risk tolerance.
It is within this discourse that the role of financial experts in seizing and making the most of on opportunities related to risk cannot be exaggerated.
Actually, increasing the competence to recognize prospects and to design mechanisms to deal with risks in my outlook therefore requires a change in the risk management mind-set across parties on how social risks, human resource risks, innovation risks, business continuity risks are managed as far as investment is concern.