Risk

Someone asked me recently, “How do you think about risk?”

Risk appetite and risk-taking are key elements in anyone's self-realization, or a company’s capacity to realize plans and objectives.   As in the case of an individual who may not know the extent of his or her own fear, the same is true of the enterprise.   It (the enterprise) may not know what it's afraid of.  Or it may not know that it's actually acting in fear.

I have seen this in corporations where someone took an initiative or made an investment that failed, was punished, and that knowledge cowed the future behavior of the enterprise because the story became known and people were afraid to suffer a similar fate. This has a high cost because the unwillingness to take risk is, in another form, the inability to learn.

When asked the question: How should I think about the future?  Well, ask something about intention.  What is it you want to accomplish?  Where do you think you are going? What's the destination - whether near, medium or far - and which of these should govern?  What's at risk?  How much personal or professional risk are you willing to take?  What are you willing to put “at risk?” Reputation? Status? Income? What resources can you bring to bear? 

You might also want to ask, what's the weather likely to be?  That's a scenario question at heart, part of informing the intuition where the future cannot be fully known or predicted.  That's not all of it. There are also the questions of what will the markets let you do?  What will your board let you do? 

In terms of The Captain’s Challenge, you have to know what you are willing to do with your ship, not just in terms of your intention but its capacities, human and otherwise. But the admiralty may have a view. And the ocean may be unkind, in all its indifference to your preferred outcome.

There's a lot of talk these days of “risk-adjusted returns,” which implies that people know enough to define returns in “risk-adjusted” terms.   If you chase that argument far enough up-stream, I think you find yourself with a model that claims to provide “the answer.” I am skeptical that models can “know” some of these answers, because I question whether they exist. Somebody with a proprietary trading model might be able to tell me that under certain circumstances, an outcome is predictable.  I think Nassim Taleb (author of The Black Swan) might say, "Yeah, it works until it doesn't."