Would you be more willing to lend to a friend if she put all of her...

Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done so? Why? Discuss in details.

Expert Solution

A rational investor who values his savings and hence tries to make the most judicious use of the same by allocating the funds to profitable projects/businesses that pose a reasonable level of risk, according to the risk tolerance level of the investor.

If a friend puts all her life savings into her business, it implies the following:

1. She is quite confident about her business proposition and must have done her thorough research, might as well have taken consultations from reseach and business consulting agencies.

2. She will not take excessive levels of risk that might jeopardize her business, and hence the investment made in such a business is comparatively less risky.

3. If she doesn't put all her money in the business, she will not suffer much due to business failure and hence might not go beyond her capacity to protect the business.

4. On the flip side, since the friend does not have any leftover savings, it implies that she might not be able to tackle the profit/loss shocks coming from the business. Hence, a balanced investment (some savings and some investment in the business) is preferred for a rational investor to be interested in the proposition.

jeff jeffy answered 1 year ago

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