Risk and Return

I had failed stuff before, but not academic stuff. When I got to University, I was left dazed and confused on several occasions. Sometimes for time pressure reasons and the sheer volume of work to get through. I was made to fully realise the limits of my academic ability. My mantra getting through was, “This is not Rocket Science. You are not pushing the boundaries of human thought. Other people have done this before.” One idea that I found really problematic coming out of the maths of finance was the oversimplifying of risk to volatility. Volatility is quantifiable. It is how much the average observation, differs from the average of the observations. So, if you know the average, how far “on average” will one of the parts be away from that. It is appealing if you can count something. If you want to believe in a world where you can clearly say return simplifies down to a number, and risk simplifies to a number. Then you can adjust return for risk. Take the level of risk appropriate for your appetite, and you choose the option at that level with the highest reward. Now, that seems beautifully simple. It is just wrong. You don’t get paid for taking risk. You get paid for value added. You don’t get paid for complexity, you get paid for solving things. You don’t get paid for not failing. You get paid for getting to a solution.

 

Repeated Choices

Life is a series of choices based on the options we are given. Where we end up depends in part on luck, in part on where we started, and in part on how consciously we play our part. A physical demonstration of this is the Galton Board. It illustrates the idea of the normal distribution. Even though there is a lot of randomness in the world, a step or two back often reveals a pattern. A wide variation for the individual, but a lot more predictability around central points. You get distributions of results. You get extremes. Our news and stories tend to focus on the extremes, and pay less attention to long-term averages and normal people. With a Galton Board, a ball will fall down, and it will go left or right, left or right, left or right. Facing repeated decisions. The situations we are in and the choices we make carry Karma. Choices have consequences. There are sometimes opportunities to correct mistakes but you have to work through historic consequences. What we do matters. History matters. We don’t all have (or want) the same choices, but we can increase the set of tools we have to have a degree of autonomy over what lies in front of us. 

Galton Board

Pay Deep Attention

All lives don’t have the same options. The challenge with reading books, watching movies, and spending time with outliers and heroes is their realities are likely vastly different. I went to watch a play about homelessness in the UK. Something as a Soutie, I had been skeptical about (“You don’t know what poverty is. Come to South Africa.”). The Actors took suggestions from the audience, and then played it out. The lesson? We have no idea how to live other people’s lives. We just think we do. The best generic advice is to pay deep attention to your options. Talk to people whose lives resonate with yours. Find mentors who have walked the path from where you are. Friends one page ahead. Don’t underestimate what you can learn from very average people. What you can learn from, rather than teach, people less fortunate than you. Don’t spend so much time trying to surround yourself with successful people that you lose yourself. Meritocracy can hide what we have under what we want.

UK National Charity for Homelessness