Risk is Mispriced Because Money Managers Face no Risk

Here’s what risk looks like:

Having to tell your six-year-old son that you don’t have a birthday present for him because you didn’t have any money left after buying food for the week.

Telling your daughter she has to attend the semi-shitty local community college instead of the awesome out-of-state school where she was accepted and is dying to go.

Shutting down your small business and taking a shitty wage job because your customers evaporated, due to financial forces utterly beyond your ken and control.

Ending up $900,000 in debt for your dead husband’s terminal cancer treatment, because you didn’t have a spare $12,000 a year to spend on health insurance.

Being forced from your family home, even from your whole community of decades- or generations-long friends and family, because you made the foolish and irresponsible decision to get married and buy a house in 2006 instead of 2003.

Looking your kids in the face as you’re taken to jail for non-appearance, because you failed to send notification to your creditor’s attorney and the court where he’s pursing you of the current correct notice address, the latest place where you’ve managed to put a roof over your kids’ heads.

The money managers and financial prestidigitators who “price” “risk” don’t face any risk. If they blow it they’ll be fine, (maybe) just somewhat less prosperous. They and their kids will go to nice schools, live in nice houses, and have good health care.

If they blow it, even to the point of blowing up their companies or the whole financial system, they’ll be fine, (maybe) just somewhat less prosperous. Even if their (firms’) behavior was deceptive and fraudulent by any reasonable measure, they face (statistically) approximately zero risk of going to jail.

They (we) have offloaded all the risk onto the people whose money those managers are managing, on the low-level employees of their own firms, and on the employees of the firms whose finances they’re arbitraging with sophisticated, high-risk, leveraged machinations.

Is it any surprise that the cost of insuring against so-called “risk” in the world of money management turned out to be so wildly underpriced? It’s because the people buying and selling that insurance weren’t facing, and don’t current face, any actual risk.

They’ve found a way to get real insurance against real risk, from real people, and they don’t even have to pay those people any premiums.

Cross-posted at Asymptosis.

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