AWARE - Will this happen to Singapore?

I am just imagining:

What will happen if such sudden takeover of power happen in political arena?

Certainly I do not wish for it. I agree totally with Kanwaljit Soin's view on this affair, but I wouldn't be following Mr Wang's call, because I don't even have a DBS account in the first place.

My favorite

A SLICE OF LIFE – Changing Your Perception

Albert Einstein famously remarked "There are only two ways to live your life. One is as though nothing is a miracle. The other is as though everything is."

Einstein was referring to perception and how every often, how well or how badly you feel about something is due entirely to the way you see it. You can instantly change your emotional state by changing the way you perceive the situation.

We live in an age of unprecedented equality – many of us have access to the same opportunities to improve our lives. Yet we find there is a whole spectrum of people stuck between Depressed and Joyful, between Yearning for More and Contented. Two persons can have the same experience and respond very differently.

Scientists used to believe that we respond to information flowing into the brain, but we now know, scientifically, that it is actually our interpretation of the information that determines our response. Our past experiences create an expectancy that is primarily based on what we "know" and what we "know" is that which has happened before.

Our belief system is one of the main ways in which our minds make sense of the world. A belief is a sense of certainty about what something means and they’re mostly formed and hardened by past experiences. In essence, we make expectations about something based on what’s happened before. For example, you might believe that you never get second dates because no one’s agreed to it in the past. As a result, you go for that first date with a gloomy forecast of what’s to come and don’t make any effort to encourage a second date. After the date, you don’t follow-up or call to arrange another meeting. Needless to say, a second date doesn’t happen. You believe it’s because you’re undesirable, but the real reason is simply that your limiting belief had caused you to sabotage your own chances!

Perception is a way of grasping and making sense of the “realities” around us. Perception links a meaning to what you take in with your senses that allows you to have the experience in your nervous system. Because perception is based on interpretation we can change it.

A change in perception is what turns the half empty glass into a half full glass. Perception explains how two people can have exactly the same experience and one commits suicide while the other becomes an inspiration for generations to come. Whatever you perceive is going to be true for you, regardless of what you see. Change your beliefs, change your perceptions, and you can change your life.

WRITTEN BY EUGENE LOH

credit: Eugene Loh, 938LIVE, MediaCorp Radio Singapore (www.938LIVE.sg).

Pricing an Opportunity (Part 2)

Assuming that from all the questioning, I have ascertained that I am going to make such investment decisions over and over again in the future, and that in each case, I can always reinvestment all my money in such opportunity.

Why shouldn't I pay $95.24 for it? $95.24 is computed using the average expected return of the opportunity, which would be $100 (150*0.5 + 100*0.5), and discounting it with 5%, which would be $95.24 (100/1.05).

It turns out that if I pay $95.24 every time I see such opportunity, my expected return would be about -9%! I will explain why:

• Upside of 150 with investment of 95.24 means that I will get back 1.575 times of my capital. Downside of 50 means 0.525 times.
  

• Now, assume that I made a string of 100 such investments consecutively, meaning I reinvest my capital into another similar opportunity again and again and again, for 100 times
  
  
• it is likely that out of these 100 investments, 50 of them will return me 1.575 times of my capital, and 50 of them will return me 0.525 times
  
  
• so at the end of these 100 investments, most likely i will get back only 0.0000744... of my initial capital, a very pathetic return.
  
  
• The working is 1.575^50 * 0.525^50
  
  
• To find the effective return for one period, we work it out as 0.0000744..^(1/100), and it turns out to be 0.909 time of the initial capital
  
  
• To convert that into return percentage, we take 1 - 0.909, which would be about -9%
  
  

Now i know i should not be paying $95.24 for it, how much lower should i bid for this opportunity? How much lower can i go so that this investment makes sense? In another words, what is the maximum amount I am willing to pay, such that any amount higher than that would make the risk-free asset more favorable.

I think it would make sense if I can expect a return comparable to risk-free return, and not -9%. To obtain the price that would allow me to get the expected return to be the risk-free rate, I need to use Geometric Mean. The working is as such:

• Take (Outcome1)^(Probability1)*(Outcome2)^(Probability2)*...
  
  
• Then discount it by the risk free rate
  
  
• In this case, we first get 150^0.5*50^0.5 = 86.60
  
  
• Then we get 86.60/(1+5%) = $82.48
  
  

The price which will allow us to obtain the risk-free rate of return for a string of such investment is $82.48.

If you pay anything more, you are paying too much, and you will be better off putting your money in risk-free assets.

In fact, there is a problem about risk preference. If you invest in risk-free asset, your return over the long run is CERTAINLY going to be 5%. But if you invest in this opportunity at price of $82.48 over the long run, your return is MOST LIKELY to be 5%, it could be more, or it could be less. Risk-neutral person will be indifferent between this two investment, but a risk-averse one will definitely choose risk-free asset. And a risk-averse person would demand a risk premium. How much is the risk premium? It depends on how risk-averse that person is.

In conclusion, the MAXIMUM a risk-neutral person should pay for such opportunity should be $82.48. A risk-seeking person may be willing to pay more, a risk-averse person will want to pay less as they demand a risk premium.

In part 3, I will try to expand the scope of this example and discuss the implications.