Quote for the Week
Elroy Dimson of the London Business School once defined risk as meaning that more things can happen than will happen. That is a fancy way of saying we don’t know what will happen, but it is a useful formulation when we take up the task of risk management. If more things can happen than will happen, we can devise probabilities of possible outcomes, but — and this is a big “but” — we will never know in advance the true range of outcomes we may face.
For example, the average annual inflation rate in the United States was only 1.4 percent from the end of 1954 to the end of 1965. But in 1965, who could have imagined that inflation would average nearly five times that rate over the next 15 years?
In short, our forecasts are wrong from time to time.
That observation sounds like a platitude, but consider the kinds of questions it provokes. How will we deal with surprises — outcomes different from what we expect? What are the consequences of being wrong in our expectations? This is the point when risk management begins to live up to its real meaning. Risk means the chance of being wrong — not always in an adverse direction, but always in a direction different from what we expected. — Peter Bernstein (source)
From the Archives
Last Call
- All We Knew in 2022 – J. Zweig
- Data Update 2: A Stock Comeback – Winning the Expectations Game! – Musings on Markets
- Stocks Have Not Always Beaten Bonds. Should You Care? – J. Rekenthaler
- A Young Investor’s Guide to Avoiding the Fast-Wealth Trap – Safal Niveshak
- Avoid Investors Who… – Investment Talk
- The Anatomy of a Market Shock – Man Institute
- Why You Should Plan To Get Less Done – Range Widely
- Understanding Human Stupidity in a Post-Truth Era – Klement on Investing
- Can Astrology Predict Life Outcomes? We Tested It. – Clearer Thinking
- Where Gummi Bears Come From – Bloomberg