Asymmetric risk
In Richard Brandson's "Screw It, Let's Do It", Brandson described a little story. A winner of Brandson's sponsored contest came to his mason for the one million pound prize. Instead of handing the check to the winner directly, Brandson had a twist for the winner: he provided an option that if the winner could flip a coin and won he could get two million pound prize. If he lost, then the one million pound would be lost too. This seems an easy decision but Brandson spent 2 pages to illustrate his point: don't take non-calculated risk. Coin flipping is one of those risks should be taking as you don't have a way to measure it. His recommendation, unspoken to the winner, was not to take it. In the end, the winner didn't take the option but the one million pound prize. It appears to be a respectful decision to Brandson.
Playing this game to people, my returns are overwhelming No to taking the option. If playing this game with an additional twist: instead of one million, say $100, however, answers start diverging: 7 out of 10 people said they would risk it. Reasons are the same: $100 is nothing. But one million pound is significant. The only 3 said they won't do that is because, surprisingly and unsurprisingly, discipline. The reason it is surprising is that there are indeed people stick to their guns. Unsurprising is that this is the rule to the same kind people.
Thinking back, understood Brandson's point of not taking inculcated risk, one may reverse the thought process: then why would Brandson offer the risky option to the winner? I think the reason is the risk people are facing is asymmetric. It appears that is the same one or two million pound to both sides. It is not: the winner needed the money to save his small company. The money probably wouldn't make a dent to Brandson's wealth, even back then. People intuitively realize this on survival stand point. In fact, this is one of the systematic risk that needs to be considered.
Once realized the risk is asymmetric and we can't calculate the risk, we need to treat it as regular risk, by discipline.
Playing this game to people, my returns are overwhelming No to taking the option. If playing this game with an additional twist: instead of one million, say $100, however, answers start diverging: 7 out of 10 people said they would risk it. Reasons are the same: $100 is nothing. But one million pound is significant. The only 3 said they won't do that is because, surprisingly and unsurprisingly, discipline. The reason it is surprising is that there are indeed people stick to their guns. Unsurprising is that this is the rule to the same kind people.
Thinking back, understood Brandson's point of not taking inculcated risk, one may reverse the thought process: then why would Brandson offer the risky option to the winner? I think the reason is the risk people are facing is asymmetric. It appears that is the same one or two million pound to both sides. It is not: the winner needed the money to save his small company. The money probably wouldn't make a dent to Brandson's wealth, even back then. People intuitively realize this on survival stand point. In fact, this is one of the systematic risk that needs to be considered.
Once realized the risk is asymmetric and we can't calculate the risk, we need to treat it as regular risk, by discipline.
posted by Intl.investment.services at
11:09 AM
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