No, I'm not, forget about the Gold standard for a minute, if you have 99% odds of success on a particular investment, should you go for it? I would say yes, now keep in mind you can still land on that 1% and lose, but does that mean it was a stupid choice?
We're still way OT but that's actually a very good and quite complex question.
The answer depends on how "success" is defined for the "particular investment," on the time horizon envisaged and also, and most importantly, on what is commonly called one's "Risk Profile."
So, for the sake of discussion, if "success" on a particular investment is defined as a return one or two points in excess of the return on the market as a whole over a three year period and if you had an opportunity to invest that could reasonably be demonstrated to have a 99% chance of delivering that return, then, sure, you'd make the investment if you didn't have other, better opportunities (in other words, if your opportunity cost wasn't too high) and if the amount risked was consistent with your risk profile.
But investment returns are seldom measured in terms of single data points. Instead, they are measured in terms of ranges of possible returns around a mean return. So, in most cases, the investment return would be presented something like: "the mean return you can expect on this investment over the next three years is x%, at a 95% or 97% confidence interval." You then have to look at the standard deviation of the distribution of possible returns around that mean and determine if you are willing to make the investment based on your own profile.
Why is that important?
It's important because there were literally dozens of models created by otherwise very intelligent young people on Wall Street that basically said that what happened in 2008 could indeed happen, but could only happen at the most extreme reaches of the distribution of possible outcomes, or, at 30 or 40 sigma.
An event "at 30 or 40 sigma" is geek talk for: there isn't much of a chance of this happening, but if it does, we're ****ed.
As it turns out, we were ****ed.
As I tell my students in my Graduate Risk Management course: "Life happens at 30 sigma, not where our models say it will most likely happen."
And, we were ****ed because all of the things that had to happen for the worst case scenario to occur did: the government, through pressure from the WH and Congress on Fannie and Freddie, gave unconscionable incentives to Financial Institutions to make really bad housing loans (including "Liar Loans"), many people took out loans their obligations under which they knew they would not be able to repay when the ARM converted on the assumption that the increase in the property's value would be so great as to enable them to refinance or get out, others took out loans they couldn't afford because they assumed they could hang on to a piece of property for a year and sell it at a large profit, somehow squeezing by in the interim, still others simply bought more house than they could afford because they wanted to live in a really nice place. In addition, secondary markets blew up the total risk exposure by untold (literally: people still don't know what the full exposure is) multiples through derivative and securitization instruments. Finally, to everyone's surprise, the Government did not bail out Lehman when it had a liquidity crisis, only stepping in when AIG's downfall would have crashed the entire system. If you want to get sick and if you're wondering why our banks are still trading below book just look up the value of the "Level 3 Assets" carried on their balance sheets.
So, the above is a long winded way of saying that we should even be wary of chances of success at a confidence interval of 97%.
A final, quick word on "Risk Profile." For a wealthy person to invest $1,000 with a 99% chance of success is a rational decision. For a lower middle class person to invest the same $1,000 with a 1% chance of losing it all and not being able to feed his family for the next few weeks is not a reasonable decision. The two individuals have very different profiles when it comes to defining their own view of risk, or their risk profile.
Thanks for a polite and interesting question.
Ian, Mods: time to move this thread to another forum unless people really still want to talk about the unfortunate Mr. Sapp. :singing:
