5 ms·

Making a bet and losing doesn't imply idiocy. What were the odds? What was the potential payoff?

by xapata 6y ago

eru 6y ago
Yes, exactly. Though it's not just odds and payoff, but also risk appetite. There's something like risk-aversion, and a corresponding risk-return-tradeoff. But unless we have evidence to the contrary, we can assume that the shareholders are broadly risk-neutral. Especially since lots of shareholding these days is via widely diversified index funds, who don't need to care whether a any single company they hold goes bankrupt as long as the expected value of gambles they take are positive.
- tankenmate 6y ago
  Indeed, so the correct question is "was / is Icahn's risk margin (since he had the largest shareholding and he's a known activist) too small?" Was there an implied direction of getting new management in turning the ship around and then flipping it? Would this lead to good long term decisions being traded off for short term ones?
- oarsinsync 6y ago
  > But unless we have evidence to the contrary, we can assume that the shareholders are broadly risk-neutral. Especially since lots of shareholding these days is via widely diversified index funds Except there are low and high risk index funds as well. Just because you're invested through a passive index fund, doesn't mean you're risk-neutral.
  - eru 6y ago
    Yes. Hence the 'broadly'. As an investor, you can also always just add leverage to your index fund holding, if you want more risk. If your jurisdiction allows you, that is.
- Tyrek 6y ago
  absolutely not. If shareholders were risk neutral, they'd be buying bonds, or holding cash. "passive" investment is wholly built upon the concept that "passive" investment outpaces active investment - the very fact that you're in the equity markets suggests you are chasing the 6-8%+ annualized returns (and associated risks) from equity investments. Passive is a replacement for stock picking, and while more conservative in nature, isn't really so in a relative sense.
  - eru 6y ago
    > If shareholders were risk neutral, they'd be buying bonds, or holding cash. Huh? Many people hold both bonds and stocks and other assets, like real estate. Index funds give you broad diversification at low fees. That diversification mostly removes out company-specific idiosyncratic risk, but it still leaves you exposed to market risk, and no one in their right mind claims otherwise. Even a risk averse person (and even more a risk neutral person) can rationally hold on to very risky assets. Risk aversion just means that you require a higher return for a given level of risk. And a risk neutral person doesn't care at all about risk, they only care about expected returns. That's mostly a convenient abstraction like the famous home economicus. I don't understand why a risk neutral person would want to prefer bonds and cash?
eganist 6y ago
The odds, according to more than a few scientists (but citing just one here: https://cmr.asm.org/content/20/4/660 https://cmr.asm.org/content/20/4/660), were 100% in not too much time. I don't know if that makes shareholders and board members "idiots," just that it's something the firm probably should've worked to mitigate a bit more effectively. Example: EHI is still holding on, and they (from my understanding based on employees I've spoken with) had continuity planning in place for situations that might've significantly impaired travel.
- eru 6y ago
  That's good on EHI. Though perhaps that planning would have cost some extra time and money that would have been 'wasted', if the pandemic hadn't happened.
  - eganist 6y ago
    > perhaps that planning would have cost some extra time and money that would have been 'wasted', if the pandemic hadn't happened. Same with insurance, which is why there are many cases where insurance is a requirement (usually cases where people dismiss the risk).
ponker 6y ago
It does when you kill the entire company. It’s like losing your house in a game of poker — the problem wasn’t going all in with pocket aces, it was putting your house in the pot.

Making a bet and losing doesn't imply idiocy. What were the odds? What was the potential payoff?

by xapata 6y ago

Making a bet and losing doesn't imply idiocy. What were the odds? What was the potential payoff?

eru 6y ago

Yes, exactly. Though it's not just odds and payoff, but also risk appetite. There's something like risk-aversion, and a corresponding risk-return-tradeoff. But unless we have evidence to the contrary, we can assume that the shareholders are broadly risk-neutral. Especially since lots of shareholding these days is via widely diversified index funds, who don't need to care whether a any single company they hold goes bankrupt as long as the expected value of gambles they take are positive.

tankenmate 6y ago
Indeed, so the correct question is "was / is Icahn's risk margin (since he had the largest shareholding and he's a known activist) too small?" Was there an implied direction of getting new management in turning the ship around and then flipping it? Would this lead to good long term decisions being traded off for short term ones?
oarsinsync 6y ago
> But unless we have evidence to the contrary, we can assume that the shareholders are broadly risk-neutral. Especially since lots of shareholding these days is via widely diversified index funds Except there are low and high risk index funds as well. Just because you're invested through a passive index fund, doesn't mean you're risk-neutral.
- eru 6y ago
  Yes. Hence the 'broadly'. As an investor, you can also always just add leverage to your index fund holding, if you want more risk. If your jurisdiction allows you, that is.
Tyrek 6y ago
absolutely not. If shareholders were risk neutral, they'd be buying bonds, or holding cash. "passive" investment is wholly built upon the concept that "passive" investment outpaces active investment - the very fact that you're in the equity markets suggests you are chasing the 6-8%+ annualized returns (and associated risks) from equity investments. Passive is a replacement for stock picking, and while more conservative in nature, isn't really so in a relative sense.
- eru 6y ago
  > If shareholders were risk neutral, they'd be buying bonds, or holding cash. Huh? Many people hold both bonds and stocks and other assets, like real estate. Index funds give you broad diversification at low fees. That diversification mostly removes out company-specific idiosyncratic risk, but it still leaves you exposed to market risk, and no one in their right mind claims otherwise. Even a risk averse person (and even more a risk neutral person) can rationally hold on to very risky assets. Risk aversion just means that you require a higher return for a given level of risk. And a risk neutral person doesn't care at all about risk, they only care about expected returns. That's mostly a convenient abstraction like the famous home economicus. I don't understand why a risk neutral person would want to prefer bonds and cash?

eganist 6y ago

The odds, according to more than a few scientists (but citing just one here: https://cmr.asm.org/content/20/4/660 https://cmr.asm.org/content/20/4/660), were 100% in not too much time. I don't know if that makes shareholders and board members "idiots," just that it's something the firm probably should've worked to mitigate a bit more effectively. Example: EHI is still holding on, and they (from my understanding based on employees I've spoken with) had continuity planning in place for situations that might've significantly impaired travel.

eru 6y ago
That's good on EHI. Though perhaps that planning would have cost some extra time and money that would have been 'wasted', if the pandemic hadn't happened.
- eganist 6y ago
  > perhaps that planning would have cost some extra time and money that would have been 'wasted', if the pandemic hadn't happened. Same with insurance, which is why there are many cases where insurance is a requirement (usually cases where people dismiss the risk).

ponker 6y ago

It does when you kill the entire company. It’s like losing your house in a game of poker — the problem wasn’t going all in with pocket aces, it was putting your house in the pot.