Balancing Risk in the Stock Market


Written by Dale Wannen

As my most recent class ended, I couldn’t help but think of the principle of diversification and how it applies not only to investing but also how students of Game Theory Academy may go about approaching the next major steps in their lives.

Throughout the 10-week session, risk tolerance is a key component to nearly every lesson taught. One of the GTA games invites students to pick 3 of 10 stocks ranking from high risk to low risk.  Of course, stock market risk tolerance becomes a hot topic as students learn the movements of risky assets and at the same time the lack of movement with assets that are “safer” than others.  Their “oohs” and “ahhs” were heard as some of their stocks went down 10% one week.  Some chose to stick with saving accounts or Treasury Bills while others chose the more risky Facebooks and Apples of the world.  You may ask “who had the best portfolio?” but you will have to read on to find out!

Every Wednesday from 4-6pm, I presented varying lessons that almost always related back to how students must understand what was in their own best self-interest and how to calculate the benefits they were giving up when choosing one action over another: the Opportunity Cost.  During one lesson we explained why having a strategy, not only in the stock market but in all major decisions, will help them come to their answers.  Referencing the Art of Strategy, a book by  Avanish Dixit and Barry Nalebuff, another GTA game asks students to guess which number between 1 to 100 the instructor has in his mind and to go about guessing in the most efficient way.  What is the correct strategy?  Many of the students quickly realized they needed to start at 50 and cut each answer in half every time the instructor stated “higher” or “lower”.

Relating back to diversification in the stock market game, the students who chose both risky and non-risky options were rewarded the most due to their diversification. In fact, the student who chose the three most risk-related stocks performed the worst.  No student was incorrect in making their choices, however it was eye-opening to the students to realize that having a risk-balanced strategy may help guide them when it comes to making decisions not only in the game of economics but also the game of life.

Dale Wannen, a Game Theory Academy instructor, is President of Sustainvest Asset Management, an investment advisory firm focused on sustainable and responsible investing.