[This is #3 in a series of Meditations on Risk.]

In the investment world standard deviation = risk.

This idea that how much something wiggles up and down equals risk is troubling me.

I am not sure why, but it might have to do with the fact that the word “risk” implies the unexpected. A surprise. Something that I can’t control.

When portfolios are designed, the idea is that we can find out how much risk you need and then design a portfolio with those precise risk characteristics.

If you want more risk, here, all we have to do it turn this dial. Tell me when it is enough and I will stop. Ok perfect, just the right amount of risk for you.

As if we can control “risk” like tuning in a radio dial.

I guess I have always thought of risk as something outside my control. Risk is the chance of something going terribly wrong. Something unexpected.

When I back-country ski, there is a risk of avalanche. There are things we can do to control for that risk, but after we do all we can to control things, the danger that’s left is called risk.

In fact to a large degree the greatest risks are the things that we have not even considered. The unknowable risks.

I think using a number like standard deviation gives us the false sense that all risk is measurable.

If we can measure it, then we can control it.

But, if we can control it, is it really risk?

Standard deviation measures what happens when the unknown becomes known. BUT, it does not tell us what will happen when the next unknown risk becomes known because we can’t know.

Sometimes this line of thinking is dismissed with the idea that history repeats itself and therefore there are no surprises.

Does that make sense how dangerous that it?

But if that is true, then why call it risk?