Lower risk increases the present value of future opportunities, but reduces the opportunity gradient. You can imagine an opportunity gradient as a plot of your value at a series of points in your future. The greater the gradient, the steeper the increase in that curve between any two future points. A result is that low risk, long term plans reduce learning, but that may warrant it’s own post.
People have a natural urge for risk in their lives. This seems very strange, and is often counter to maximizing value. For example, why do objectively rich people with stable futures do dumb things like climb Mount Everest or ride rockets? These activities are extremely costly for these demographics; the risk reduces the present value of their giant piles of investments and future income! (Also, they might die!)
Hypothesis: people are more interested in maximizing their opportunity gradient than they are in maximizing their present value. They want their future to offer more value than they have today. High interest rates (risks) are more exciting and interesting than an unused pile of money.
A quick and easy way to increase that gradient of future value is to take dumb risks today. These risks may not increase future value, but they immediately reduce present value, thus increasing the relative future value and, consequentoy, the gradient. (When theres nothing left to lose, you have everything to gain!) Risk stops the present from stealing all the value of your future actions.
I think this is basically right. Future reward often requires risk, and in disparate situations we try to calculate the tradeoffs with varying degrees of luck and skill. It is unfortunately not audio described (as of a month ago), but I highly recommend the documentary The Alpinist for a fascinating look at the psychology of a life-long risk taker.
A few knitpicks: Did you mean high interest rates, or the possibility for a high return on investment? I think speculative ventures attract far more risky behavior than high interest rates on loans. I am also unclear how you are using the word “value” here. Does this mean your net worth? The space containing all possible opportunities you have in the future? Self-actualization?
Finally, some related concepts I’m exploring: hyperbolic discounting (why are we so bad at making decisions that are best for us in the long run) and clawback incentives (which involve giving people a reward before completing a task and take it away for noncompliance or poor performance on that task). I think you will find both ideas fascinating!
High interest rate is intended as a more familiar stand in for a large discount rate, not necessarily a high return on investment. Risk dies not, by itself, increase future value.
Value refers to any measure of goodness or desirability of a state of existence. It is used vaguely.
Wow, as if on queue the below video on loss aversion popped up in my feed. I think it’s ripped whole cloth from Kahneman’s Thinking, Fast and Slow, but it’s a cool illustration of how we mechanistically evaluate risk.
https://www.youtube.com/watch?v=vBX-KulgJ1o