The Immortality of Risk

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In 1763, the Berlin Academy offered a prize of the best essay on the application of mathematical proofs on metaphysics. Immanuel Kant, the thinker who later revolutionized philosophy came second. So could have beat him? It turned out to be Moses Mendelssohn. With the wind in his sails, he decided to take on the prevailing obsession with the philosophical notion of materialism by writing on the immortality of the soul. That is, the body may perish, but the soul continues to exist. He modeled his work on a dialogue done by Plato. The resulting output saw him being hailed as the “German Plato” . Today, debates around the immortality of the soul are not so popular, but in science there are numerous notions of immortality. The law of conservation of energy, for example, states that energy can neither be created nor destroyed, but only the form can be changed.

In financial markets, one could think of risk as a form of energy. So while it’s form may change, it can never really be “destroyed”. Indeed, the word “risk” comes from the Arabic word “rizq”, which means gain or loss in provision and traditionally has been thought to be pre-determined (so there’s only beta, and no alpha or individual skill). If true, then periods of seeming calm may simply be an illusion of low risk. One could think of risk like a mole in the old arcade game, “Whac-A-Mole” – you hit one mole, only for another to pop its head up somewhere else. The lesson would to be embrace the reality of risk, rather than delude oneself with the illusion of stability.

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