"Anxiety-adjusted returns"

Philip Morgan

Smart people writing about risk-taking with investments is like candy to me.

This article is the source of the mouth-wateringly delicious term "anxiety-adjusted returns": https://oxfordrisk.com/combatting-the-risk-of-risk-mismanagement/

A bit more context, via an excerpt from the article:

Risk management is not about avoiding risk, it’s about getting the best deal for the risks you choose to accept. It’s not smart to pay with foregone returns for protection from volatility when it’s only the visibility of the volatility that affects your emotional comfort. Sometimes, shutting your eyes can open you up to otherwise overlooked opportunities.

The most successful outcomes – the anxiety-adjusted returns that account for both investment returns and the investor’s emotional comfort – are determined not by avoiding complexity, but by knowing how to navigate it.

For investors with very low composure, that are prone to panic-sell in response to any market dip (and especially for those investors that are also prone to track their portfolio more frequently, and therefore see more dips to panic about), limiting exposure to volatility might be a good means of managing their risks of poor ultimate returns. However, for many there is a better way. Taking risk without being emotionally derailed by volatility can be accomplished more cheaply for most by both preparing for, and reducing the visibility of, short term ups and downs. Why pay with lower expected returns what could be bought with tailored education, or changes to how financial information is presented, or well-timed reminders of the longer-term plan at the exact moments it’s threatened by short-term behavioural tendencies?

If you do something bold and risky with your business, this advice applies to you.

This especially applies if the goal of your work is transformation (rather than optimization). For us, the road to having the authority needed to effect the transformation we aspire to can be a volatile path.

Here's the "explain it like I'm a 5th grader" version:

  • If you automatically freak the heck out when the near-term future gets uncertain, lower your ambitions for your business. Trade stability for potential upside. Play it safer so that you don't cost yourself money by regularly flinching.
  • If you can remain composed and avoid such freakouts -- or just aren't prone to them in the first place -- be really ambitious with your business and regularly embrace risks that can help you increase visibility, trust, and authority with your audience.

This is why I don't think the mental model of an individual bet is a good one for business decisions.

Bets are gambles on uncertainty that are resolved realtively quickly through a process we can't influence after the bet is placed (and if we do find a way to influence the process by which the bet is resolved it's usually considered cheating).

Our business decisions have an implementation period during which there are multiple opportunities for us to influence the outcome for better or worse. That makes them much more like long-term financial investments, except that to a large degree we function as both the investor and the market. How we react to our initial decision during the months or years-long implementation period for that decision significantly influences the outcome.

Can we learn from how professional gamblers manage a series of bets or a career of gambling? Possibly. Is that the best place to learn from? I'm not sure. I've got to keep thinkin' on that one.


(This article was originally an email sent to my list. I hope you found it helpful. If you’re looking for more context and detail on specialization and positioning, then read my free guide to specialization for indie consultants.)