Risk Aversion

Robert Samuelson has an interesting column about the economic problem of risk-aversion:

The Great Recession’s most worrisome legacy could be this common allergy toward risk-taking. Having underestimated risks in the bubble years, we may overestimate them now. Consider the shriveling of venture capital – a big source of money for high-tech start-ups. In 2009, venture capital funds received less than half the $35 billion they raised in 2007, and inflows in 2010 are running 27 percent below 2009 levels. The institutions (pensions, endowments) and wealthy individuals that provide venture capital have less money to invest and are less willing to commit it to chancy firms.

I would put this another way, though. The allergy toward risk-taking isn’t a consequence of the recession, it’s something that existed even beforehand. After the dot-com bubble and the Enron/Worldcom accounting scandals, people were looking for safe investments. And the selling point of housing (for ordinary households) and mortgage-backed securities (for big shots) was that this was supposed to be a basically safe non-speculative investment with a somewhat higher yield than a savings account or a treasury bond. That turned out to be an illusion, but it was a risk-averse pursuit from the beginning.