-

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 individual
 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 ecircumstances,
 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 likelihood
 of ruin to the United States Steel Corporation from its
projected investment of $75,000,000 to found a new steelproducing
 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 capitalization
 of uncertain income. The most important classification
 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.