Comments on Richard Zeckhauser's Investing in the Unknown and Unknowable
4 Pages Posted: 23 Jan 2013
Date Written: January 23, 2013
Richard Zeckhauser’s important paper “Investing in the Unknown and Unknowable” provides a very different perspective on the investment process than the approach taken in either standard treatments of financial economics or more recent behavioral finance approaches. He focuses attention on the very large class of investments that are one-off and whose payoffs are not just difficult to predict, but have a range of possible outcomes that is difficult to enumerate. Such an emphasis is surely welcome. Any economist, particularly one who has not had extensive real world experience, will learn a great deal from this paper.
While much of the paper is directed at providing investment advice to its readers, its significance goes far beyond the investment process. Investment decisions are among the easiest for economists to study because the objective — making money — is clear, allowing success and failure to be easily judged. Much more consequential decisions, such as whether to invade Iraq, how to combat global warming, choosing whom to marry or how many children to have or what house to buy, have important unknown and unknowable aspects as well. And so lessons learned about how investment decisions and how they are and should be made are significant far beyond the field of finance.
In my comments on this paper, I will focus first on the investment advice contained within and then conclude with a broader reflection on the implications of Zeckhauser’s analysis. I have no doubt that the vast majority of us would do very well to take investment advice from Richard Zeckhauser. The examples cited in his paper are, I suspect, not isolated. The same attributes that make him a world class bridge player contribute to his great shrewdness in making investment decisions.
This paper is a comment on Investing in the Unknown and Unknowable by Richard J. Zeckhauser which can be found at: http://ssrn.com/abstract=2205821.
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