When the poker players on cable television have just a so-so hand, there’s always that point where they have to make the big decision. Do they bet big and try to bluff their opponents into thinking they have a great hand? Or do they back off and maybe fold?
At that moment, they’re facing a classic financial decision: To get big rewards, you often have to take a big risk. You have to push the pile of chips into the middle of the table-and risk losing it all-to have the chance to win big.
There are all kinds of similar examples in investing. To make big money in the stock market, you might gamble on a hot, fast-growing company that may already be highly priced, or take a chance on a company that needs to turn around its business. Both could pay off, or disappoint.
Interestingly, while you’re balancing your own risks and returns, companies that you want to do business with are often looking at you with the same trade-off in mind. Throughout your life, they are going to assess how chancy you are, and that will determine how generously they treat you. When they take big risks, they expect big rewards.
Here are a few of the areas where businesses look at you as a risk in determining how they treat you.
INSURANCE. The difference in what adults and teenagers pay for auto insurance is enormous, largely because their driving records are different. Insurance companies gather enormous amounts of data about drivers, accidents and damage to vehicles and use that information to assess risk and set their rates accordingly.
In Dallas, for instance, a 16-year-old boy will pay 3.5 times more for insurance than an adult. A girl the same age will pay 2.75 times more. The girl’s rate will fall to an adult’s rate when she turns 21, while a young man’s rate won’t drop until he turns 25. “Young drivers have more accidents and more severe accidents,” says Richard Ramirez, a Dallas agent for State Farm Insurance, and boys have more than girls. Getting a ticket may increase your premium because it reflects riskier behavior.
There is a chance for some relief, though: Students with a “B” average or better at the beginning of their junior year can get a 10% discount. “We’ve learned that kids who are more serious students have fewer accidents,” Mr. Ramirez says.