In his recent presentation at The Wharton School, Howard Marks provides some great examples of proof that risk is counter-intuitve. Here’s an excerpt from the presentation:
Marks: Now, let’s talk a little more about risk. I believe that risk is counter-intuitive. So they did an experiment in the town of Drachten, Holland. They removed all the traffic signals, the lights, the signs, and the road markings. And what do you think happened to accidents?
They went down!
How could that be? Isn’t driving more dangerous when you don’t have lights, signs?
No, because people saw it. Oh, no lights, no signs, I better drive more careful. And so accidents went down under ostensibly riskier circumstances.
Jill Fredson, an expert on Avalanches said that every year they develop better and better mountaineering gear but the number of fatalities does not decline. Why? This is because people say, oh I have safer gear, I can do riskier things, and it draws them into riskier behavior.
So what this says if you think about it, is that the risk in an activity does not reside in the activity. It resides in the behavior of the people participating in the behavior.
And likewise, I believe that the risk in investment comes from the behavior of the participants, not from pieces of paper called stock certificates, not from buildings called Stock Exchanges, not from the companies themselves, the risk comes from the behavior of the people.
You can watch the entire discussion here:
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