The brilliant and pseudonymous Equity Private has a short, crystal clear piece up on her blog commenting on the urge government has to enact heavy-handed legislation in the wake of financial failures.
Equity Private: The Crime of Losses
The bemused surprise that would formerly accompany a free lunch has turned into something like annoyed restlessness. Today, a free lunch is received with a look that says "what took you so long and where is desert?" Return is expected without the attendant risks.
I fail to understand why so many otherwise clever people put their head in the sand about risk and only ever look at potential return. It's not just investors and lawmakers, it's finance professionals too: people who should know better.
Risk is not some vague abstract notion, it's right there, breathing down your neck. If there was no risk, the payoff would be minimal. Of course, in return for the prospect of a high payoff, the chance you take is that there will be no payoff at all. "00" on the roulette wheel doesn't happen every time the croupier spins the wheel, that's why the payout is 35-1. Even with a Red or Black bet and a 2-1 payout, there's a 50% chance that you will lose.
Equity Private: The Crime of Losses
The bemused surprise that would formerly accompany a free lunch has turned into something like annoyed restlessness. Today, a free lunch is received with a look that says "what took you so long and where is desert?" Return is expected without the attendant risks.
I fail to understand why so many otherwise clever people put their head in the sand about risk and only ever look at potential return. It's not just investors and lawmakers, it's finance professionals too: people who should know better.
Risk is not some vague abstract notion, it's right there, breathing down your neck. If there was no risk, the payoff would be minimal. Of course, in return for the prospect of a high payoff, the chance you take is that there will be no payoff at all. "00" on the roulette wheel doesn't happen every time the croupier spins the wheel, that's why the payout is 35-1. Even with a Red or Black bet and a 2-1 payout, there's a 50% chance that you will lose.
Regarding the moves afoot to criminalize financial failures in the wake of investor losses at Bear Stearns, Amaranth, and others, if government was really able to criminalize arrogance and poor decision making, I would be in real trouble!
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