Risky Business

by Ben Perreira

It has been said that the problem to be overcome in the field of economics is scarcity. I would modify that to say the biggest problem is risk. Economic transactions often depend on offloading risk to another party. A few examples:

– An interest rate is calculated using a series of risk-adjusted rates (market, inflation, maturity, etc.). This is why students generally have higher credit card interest rates than their parents.

– Brands take risk away from consumers. You can buy Ralph’s brand detergent for less than what Tide costs, but Tide is more accountable if you aren’t satisfied. You pay a premium for that peace of mind.

– B2B contractors remove some risk from their clients. Ford’s ad agency in India took the fall for some tasteless creative that was leaked.  

What about scarcity? Consumers pay a premium for the risk that they won’t be able to get that in the future. Diamonds (according to the DeBeers company) and gold may one day be gone, you better buy now and buy high!