We were at Hotel Leela, listening to Mr Rolf Dobelli on behavior biases at a dinner event hosted by IDFC when I told my good friend Puneet Khurana about my plan to jump from a perfectly normal plane just for kicks. (SKYDIVING)
To which he said, this is in direct contrast to your risk management style when it comes to stock markets, aren’t you suffering from cognitive dissonance because of this decision.
To reiterate what he meant was, being a Taleb follower, I always like to keep myself on the right side of a black swan. Which is to say, rare ‘one-off’ incident if it happens, should be beneficial and not catastrophic to the finances and therefore I say NO to any strategy where Risk of Ruin is possible, howsoever negligible.
By this logic, an investment in banks and over-leveraged plays is like a fragile glass which is bound to break in bad times (earthquake & credit crunch) and similarly a medical company doing drug research is like a very cheap OTM call with hidden Optionality to explode. Heads I win BIG, tails is status quo.
With this backdrop in mind, doing sky-dive almost feels like cognitive dissonance of a cigarette smoker. (He knows what he is doing is plain and simple stupid, but he cannot help it because he is hooked and addicted)
Now let us have a look if Sky diving is cognitive dissonance of an Adrenaline junkie or NOT.
I recently interviewed Ralph Vince on Stoic Podcast and we did touch on this interesting topic of risk management.
I asked him, if Warren Buffet betting 40% of the corpus on a single bet (Amex) was prudent risk management or was it stupid, to which he said you cannot judge a manager’s risk management in isolation with one-off decisions, it all depends on the ‘Criterion’.
Your ‘Criterion’ changes everything. If your criteria is to survive forever, surely betting 40% is just a ridiculous idea, however if your purpose is to get rich by betting on skewed equations in a pari-mutuel system, then one-off BIG bets can change the whole game on its head and as Warren Buffet has rightly said, YOU HAVE TO GET RICH ONLY ONCE.
What that means is that if Warren Buffet suffered from Over confidence and started betting 40% on every third or fourth bet, he surely would have blown up. Once you cross a certain threshold, you start loading that much lesser (also not by choice but by force as the sheer size of your corpus becomes a constraint)
Now, let me bring this knowledge to my skydive decision. If your idea of life is to just live and exist, surely doing skydiving makes no sense at all. However, if your Criterion is to live a little, have experiences, a little adrenaline kick then after doing base rate calculations you would not mind seeking ’One-offs’.
Warren did his due diligence and realized it is a once in life opportunity where everything is aligned together. ( Good, able and ethical management, Great monopolistic moated business with float going through a serious problem which is temporary) That is a GOD SENT combination and warrants a One off BIG allocation.
Sky Diving as an experience is safer than Cricket and Football (no.of instances/total attempts)
While jumping from a plane seems like a higher risk quotient, (thanks to vividness bias) you are 50 times more likely to die from a road accident if you drive in New Delhi.
United States Parachute Association (USPA) recorded 24 skydiving fatalities in the U.S. out of approximately 3.2 million jumps. That’s 0.0075 fatalities per 1,000 jumps-among the lowest rate in the sport’s history! Tandem skydiving has an even better safety record, with 0.003 student fatalities per 1,000 tandem jumps over the past decade.
And if you consider Risk Homeostasis, (The safer skydiving gear becomes, the more chances skydivers will take, in order to keep the fatality rate constant. ) you would soon realize that it is actually safer than Cricket and football.
So what is my point. Am I justifying my act by blank statistics? HELL NO. I know enough about futility of back tests when it comes to risk of ruin. It is the same example as how much money would you take to pull a trigger if only 01 out 06 or 600 barrels were filled with a bullet.
However, IT ALL DEPENDS ON CRITERION. Surely in parallel history, Warren Buffet’s AMEX Bet would have, could have gone horribly wrong and if you have seen the movie MONEY BALL, you would realize that which comes first, confidence or success is highly controversial, in-fact they feed on each other and therefore you would never have heard of WB as nobody writes a book on losers.
Before this topic moves into philosophical world of destiny and luck, let me quickly halt it in its track and end it with one final thought, if I get addicted to this thrill and seek it again and again (that would probably be a stupid endeavor and would be cognitive dissonance, otherwise as a ONE OFF, i think IT WAS TOTALLY WORTH IT, an EXPERIENCE WORTH HAVING.
Like Swamy Parthasarthy says in his book Vedanta Treatise, The middle path is the right way. Both Abstinence and over indulgence is for the IDIOTS.
In any event, whether you agree or not, have a look below at my JUMP.