On Risk and Asymmetries

Imagine I came up to you on the street, as a stranger, showed you a fair silver dollar coin, and offered a wager. Heads, you give me $1. Tails you give me $1. Many people might be willing to take that wager, it’s only a buck, and the coin is fair. There are no shenanigans here. Raise the wager to $5 and fewer people will take you up on the offer. Raise it to $20 and you’ll probably get no one to. The odds have not changed at all, but the possible loss has changed, and this risk aversion is what is causing the drop in engagement. But what if you change the odds? Heads, you pay me $5, tails I pay you $20? The engagement rate might go up now due to the fact the risk is now asymmetrical and in their favor.

Life is full or risk and those risks are almost never fair coin tosses. And people almost never have the same risk tolerance on the losing end that they do on the winning end, as shown above.

Likewise, investing is not a coin toss either. It is not a 50/50 proposition that something like TTD or TWLO will go up or down 12 months from now. The question is how stacked are the odds and what are we willing to lose in exchange for what we could possibly gain? Is this a $5/$20 example, or more like a $8/$12 example?

I’ve come to realize that what we are doing here is looking for the asymmetrical risks and then pouncing on them. I think it finally sank in to me when I saw that my portfolio took a plunge over 16 weeks, but took only 10 weeks to gain it all back plus a little bit more. I also realized that even though my plunge was greater than the general market in percentage terms, my balance was still noticeably higher than my benchmark. In other words, the asymmetrical risks PAID OFF because the profile was in our favor.

I wish I had realized this slightly sooner, because I likely would not have dumped MDB last month. I’m likely to get back in shortly, albeit at a smaller allocation because at this point I believe the risk profile is good, but not fantastic. It also means I’m not freaking out right now about NTNX, though I will almost certainly sell half, if not all, shortly as well.

So the next time someone tells me this style of investing is too risky I’ll say “you are right, and it works because the risk is asymmetrical”.


Heads, you give me $1. Tails you give me $1.

Sure I take it! I love a 100% chance of losing a buck! :wink:

Denny Schlesinger


So much for my proof-reading skills!! :smiley: