It feels like buying life insurance accomplishes the ‘minimize exposure to large downsides’ objective he discusses. What’s the difference, utility-wise, between life insurance that pays out to their spouse/children in the event of their death and a stock that pays off the same amount at the same probability as death?
It seems like these two things should be comparable, but that the life insurance investment is preferable because it mitigates the problem of the children not being provided for (no exposure to large downside) whereas the stock does not (exposure to large upside, still have exposure to large downside).
It occurs to me a lot of these problems effectively stem from the fact that there is a fundamental bias towards large-downside risks; we can be killed or crippled, but there is no symmetric likelihood of living forever or becoming superhuman (for now).
Agreed, but what it accomplishes is helping to make total distribution of risk have the shape he is advocating. When you said ‘taken literally’ I inferred that to mean we should try and make our total risk distribution look like a lopsided barbell, and it seems like the division between investing in a specific asset class and the multidimensional risk you describe dissolves under that construction.
I would expect that people with enough money to invest in Treasury bonds and startups almost all have life insurance, so they have already taken the same hedging step with the same goal as the low-savings couple. This makes it seem like they might have the same risk strategy, but execution of strategies takes place over time and it just unfolds more slowly because they have less income.
But having articulated it in that way, it occurs to me that there is a very big difference between deploying the barbell strategy in each risk dimension, and deploying the barbell strategy for total risk. That seems to shift the most important task from distinguishing risks within a dimension to comparing risk between dimensions, because investing a lot of thought in managing a dimension with very low risk-mass doesn’t affect total risk very much. Further, some dimensions may be all exposure-to-cost and little to no exposure-to-benefit, as with disability/death.
I like the insight that there is also risk affecting the dimension itself, as in the freezing of assets example. Logically there must also be the possibility of new risk dimensions appearing, which a little reflection suggests is obvious at least in the sense of our learning about them even if they were there all along, like germ theory. That makes me wonder about using risk management techniques to detect unknown dimensions.
Edit: I’m not driving at anything in particular here, this is all just a bit stream of consciousness that I wanted to note.
It feels like buying life insurance accomplishes the ‘minimize exposure to large downsides’ objective he discusses. What’s the difference, utility-wise, between life insurance that pays out to their spouse/children in the event of their death and a stock that pays off the same amount at the same probability as death?
It seems like these two things should be comparable, but that the life insurance investment is preferable because it mitigates the problem of the children not being provided for (no exposure to large downside) whereas the stock does not (exposure to large upside, still have exposure to large downside).
It occurs to me a lot of these problems effectively stem from the fact that there is a fundamental bias towards large-downside risks; we can be killed or crippled, but there is no symmetric likelihood of living forever or becoming superhuman (for now).
Yes, but this is an entirely different thing than holding a low-risk asset. It’s a high-risk asset that’s constructed to be a hedge.
Agreed, but what it accomplishes is helping to make total distribution of risk have the shape he is advocating. When you said ‘taken literally’ I inferred that to mean we should try and make our total risk distribution look like a lopsided barbell, and it seems like the division between investing in a specific asset class and the multidimensional risk you describe dissolves under that construction.
I would expect that people with enough money to invest in Treasury bonds and startups almost all have life insurance, so they have already taken the same hedging step with the same goal as the low-savings couple. This makes it seem like they might have the same risk strategy, but execution of strategies takes place over time and it just unfolds more slowly because they have less income.
But having articulated it in that way, it occurs to me that there is a very big difference between deploying the barbell strategy in each risk dimension, and deploying the barbell strategy for total risk. That seems to shift the most important task from distinguishing risks within a dimension to comparing risk between dimensions, because investing a lot of thought in managing a dimension with very low risk-mass doesn’t affect total risk very much. Further, some dimensions may be all exposure-to-cost and little to no exposure-to-benefit, as with disability/death.
I like the insight that there is also risk affecting the dimension itself, as in the freezing of assets example. Logically there must also be the possibility of new risk dimensions appearing, which a little reflection suggests is obvious at least in the sense of our learning about them even if they were there all along, like germ theory. That makes me wonder about using risk management techniques to detect unknown dimensions.
Edit: I’m not driving at anything in particular here, this is all just a bit stream of consciousness that I wanted to note.