Chapter 8 poured skepticism on models that attempt to measure “the cost of capital” as if it exists out there to be discovered. Instead, the chapter emphasized that it is a personal matter; we all have different risk tolerances. One’s risk tolerance depends on one’s situation, young versus old, deeply in debt or not, family commitments or not, male versus female (we are told). Gamblers might even like risk.
And yes, also rich versus poor and the very rich versus the rich. Risk tolerance typically increases with wealth, with empirical research to back it up. So a multibillionaire might invest in a space exploration company as Elon Musk, Jeff Bezos, and Richard Branson have done. What’s the big fuss in losing $2 billion when one has $30 billion? But that might be too much of a gamble for the regular Joe or June.
Considers the investment boom in AI in 2024 and 2025. Tech firms were investing heavily in AI with $1 trillion forecasted as the total investment by U.S. Firms. But it’s a growing crowded number of competitive firms with some uncertainty about who will win and who will lose. AI has potentially high payoffs but with high risk. Indeed, the uncertainty was underscored when, in January 2025 a Chinese firm released DeepSeek, AI with similar capabilities, but at a fraction of the cost. The shock hit the stock prices of firms involved in AI as well as NVIDIA, the supplier of chips for AI. One has to ask: Do I, with my risk tolerance, want to invest?
The point sharpens when one recognizes that the tech firms involved already trade at high valuations. Better to leave this to the Softbank billionaires?