Risk Tolerance, Inflation, DARPA & AI.

What is your risk tolerance?

During the financial planning process we ask questions about – well, everything that might possibly be useful in understanding our clients as they consider their priorities, concerns, strengths, limitations, etc., etc. Specifically with regard to developing and maintaining a proper investment policy it is useful to assess our client’s risk tolerance. A relatively new idea in this regard is that there are actually three aspects to be measured and understood. The first, and most important is called Risk Capacity, which considers factors like the holding period of the investment, the need for current income, and the availability of other assets. Risk Perception has to do with the level of investment experience/knowledge possessed by the investor. This factor should be considered with regard to the third factor, Risk Attitude/Tolerance, which seeks to understand the investor’s willingness to stay invested in down markets. Novice investors (low risk perception value) are unlikely to truly understand their own level of risk tolerance. A good adviser can help his client understand her risk tolerance in terms of capacity, perception and attitude. Thanks to Michael Kitces for his work on this and many other matters related to good financial planning.


Inflation concerns have many retirees worried about running out of money.

As the preceding title of an article published to the CNBC web page points out, inflation is on the minds of some retirees. It’s also on the minds of investors, CEOs, and financial planners. But for our clients, inflation concerns are addressed prior to retirement and therefore not reason for worry during retirement. Our planning models assign annual inflation adjustments to each cash flow item. The assumed rates can vary based on the nature of the item. For example, we assume that cash flow items related to healthcare will increase at a greater rate than transportation costs. So, the question is: Should you worry about inflation? The answer is: Yes, you should worry about inflation when you are planning your retirement so you won’t have to worry about running out of money later.


Should we be concerned about artificial intelligence?

“More than any other time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction.  Let us pray we have the wisdom to choose correctly.”

– Woody Allen

The above quote from humorist Woody Allen is used to introduce one of the chapters of James Barrat’s book, Our Final Invention: Artificial Intelligence and the End of the Human Era. In this book, Barrat identifies serious, even existential risks associated with artificial intelligence. I posted about this book a few years ago. You can review the post by clicking the link below.

Artificial Intelligence, Accelerating Change (fpai.net)

I was reminded of the book recently as I read a piece in The Economist where the author points out that the success of America’s Defense Advanced Research Projects Agency (DARPA) has invoked similar agencies in other countries. For a quick listing of some of DARPA’s accomplishments I am reproducing a paragraph from the article below.

…Using messenger RNA to make vaccines was an unproven idea. But if it worked, the technique would revolutionize medicine, not least by providing protection against infectious diseases and biological weapons. So in 2013 America’s Defense Advanced Research Projects Agency (DARPA) gambled. It awarded a small, new firm called Moderna $25m to develop the idea. Eight years, and more than 175m doses later, Moderna’s covid-19 vaccine sits alongside weather satellites, GPS, drones, stealth technology, voice interfaces, the personal computer and the internet on the list of innovations for which DARPA can claim at least partial credit… (The Economist, June 5, 2021)

Artificial intelligence (AI), and potentially artificial superintelligence are not specifically mentioned in the excerpt above, but if/when artificial intelligence surpasses human intelligence it will be too late to solve the “AI Control Problem”. In addition to James Barrat, Elon Musk, Nick Bostrom, Stephen Hawking, Bill Gates and others have expressed concerns regarding the dangers of “Super AI”. Of interest is what entity is likely to first create superintelligence – DARPA, Google, Apple, Microsoft, Russia, China? Barret’s book suggests that the answer to this question could portend the end of the human era. Being an optimistic sort I am hopeful that humankind will find a better alternative.


A scientist queries his laptop computer: Is there a god?

Computer: I cannot answer that question because it requires greater computing power than is available to me. Suggest you connect my processor to your desktop computer.

Scientist after merging the two computers: Is there a god?

Computer: I cannot answer that question. Suggest you network your home and business computers.

Scientist after networking all of his computers: Is there a god?

Computer: Still not enough computing power. Suggest you connect to the internet, including all public and private networks and all computers.

Scientist after connecting to all computers and all networks: Is there a god?

Computer: Yes, there is now.

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