Tuesday, February 22, 2011

Jane Austen's guidance on risk management

Perhaps it might seem odd that one can draw anything from Jane Austen's classic, Pride And Prejudice, in regards to our profession, but alas it is possible, and I believe I have.

The scene occurs at the start of Chapter 5 in Volume 3, shortly after the main character, Elizabeth, has learned that her younger sister, Lydia, has eloped with the once respected, more recently loathed, military officer Wickham. Elizabeth's uncle reflects upon what has occurred: "It appears to me so unlikely that any young man should form such a design against a girl who is by no means unprotected or friendless, and who was actually in his Colone's family, that I am strongly inclined to hope the best. Could he expect that her friends would not step forward? Could he expect to be noticed again by the regiment after such an affront to Colonel Forster? His temptation is not adequate to the risk." (emphasis added) In other words, Surely this man, Wickham, must weigh the risks of his actions and realize that they are such that to put Elizabeth's sister in any jeopardy isn't worth it.

Being aware of the risks is a critical part of investing, whether it's an investment of our money, time, or emotions. Too often investors don't consider the downside of their actions. As is often stated, risk isn't bad, what is bad is not taking the risks into consideration or knowing what those risks portend. One could argue that the gifted Jane Austen was offering some advice which is worth considering, did she not?


  1. Hi Dave, very nice find from the literature -- yes indeed...

  2. Dave,
    This is exactly why it is so difficult to defend the common practice of considering performance attribution without simultaneously considering its parallel risk attribution. Modern Portfolio Theory explicitly warns against the myopic approach of not weighing the risk when considering any expected benefits.
    So if I evaluate the amount that a decision contributed to my active return without also evaluating how much that same decision contributed to my active risk, then I will be left completely ignorant as to whether the temptation was adequate to the risk.

  3. Thanks, William! Unexpected but useful for a blog post!

  4. Andre, interesting point. As you no doubt know, risk attribution isn't nearly as commonly used as return attribution. I agree that there is definite justification for its employment, however, and that tying it into the return side has value.


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