More on Risk Tolerance
There’s a number of good comments on “Risk Appetite or Volatility Appetite,” and I’d like to respond to two of the themes.
The first is “risk appetite is an industry-standard term.” I don’t dispute this. I do question if I should care. On the one hand, terms that an industry picks up and uses tend to be useful and revelatory. Sometimes, they are also distortive. Risk appetite makes sense from the perspective of the financial industry, which is selling products of various riskiness. Knowing their customer’s appetite for risk makes sense. It makes sense even if that appetite is formed on false premises, that you must accept higher risk for a higher return. This is clearly false-just look at interest rates on insured savings accounts. A great deal of return is a function of information, and the willingness to find and use it. (Admittedly, a high interest rate may correlate with moral hazard on the part of the insured bank, and you may have to accept getting your money back later.) I think that the term risk appetite is also distortive, in that it influences the way people look at risk. I once caught myself looking for a risky investment, rather than one with a high expected upside. That high-reward investments often include lots of risk doesn’t mean it’s what I’m looking for.
The second is that I misunderstand risk. That may well be true, but I think that the goal of disaggregating risk from reward is useful. Anyone who’d like to offer up a more purely disaggregated risk is free to do so. It’s an interesting thought experiment, one that’s clearly making many readers uncomfortable. That’s not my usual goal, but I’m willing to accept it now and then in exchange for a rewarding conversation.
(These dice are from NelC, too.)