- 
Skc. 7] THE RISK ELEMENT 277 
is the ratio of the commercial to the riskless value 
(+35 x $= 145) and may be called the coefficient of risk. 
The coefficient of caution expresses a feature of individ- 
ual character as determined partly by nature and partly 
by environment. In times like the colonial period when 
lotteries were common, or in places like Monte Carlo, where 
gamblers congregate, the coefficient of caution is such as to 
represent an abnormal lack of caution. The opposite 
extreme is found in the timid investor who hoards money 
rather than risk its investment in any form. The coefficient 
of caution also varies with the same individual under 
different circumstances. Chief among these varying ecir- 
cumstances, as Professor Norton has pointed out, is the 
amount of capital of which the individual is possessed. 
The more capital a man possesses, the less is his chance 
of serious loss in any enterprise involving risk; and for this 
reason a rich man finds it possible to grow still richer. 
The rich can well afford to lose millions where the poor 
could barely afford to lose hundreds. There is less likeli- 
hood of ruin to the United States Steel Corporation from its 
projected investment of $75,000,000 to found a new steel- 
producing city than there would be to a workingman 
who makes a ‘ safe ”’ investment of $1000. 
§7 
We are now in a position to apply these principles of 
probability to the valuation of capital, i.e. to the capitaliza- 
tion of uncertain income. The most important classifica- 
tion of investments from a practical point of view is into 
two categories of safe and unsafe investments. But even 
in so-called safe investments the element of risk enters. 
As between bonds and stocks, the latter usually represent 
the precarious and the former the safe investments ; yet 
in’ the case of bonds, the receipt of interest and principal 
is always in some degree a matter of uncertainty. 
1 For a mathematical statement, see Appendix to Chap. XVI, § 1.