How Hollywood, lotteries and mutual funds show that all risk is relative
Jul 6th, 2009 | Filed under: CAPM / Alpha Theory, Today's Post
One of the great ironies in the hedge fund industry is the propensity for many investors to favor relative returns over absolute returns. This is particularly true among retail investors who, by and large, would prefer to lose money along with everyone else than to make less than everyone else. What else could explain the complacency with which investors accept -40% market returns while crying foul at the hedge funds that “under perform” in a bull market.
Research into happiness has dispelled the notion that utility is derived from some absolute level of wealth. Instead, it appears that utility is relative, not absolute – hence the paradox of the retail investor who is petrified of under performing his neighbours, but sanguine about losing his shirt alongside them.
More than some esoteric argument, the phenomenon of relative wealth may actually account for the overwhelming amount of empirical evidence than seems to refute the hallowed Capital Asset Pricing Model. In a paper released last month based on his new book “Finding Alpha“, author Erik Falkenstein argues that: More…
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[...] Are investors more worried about relative risk than absolute risk? (All About Alpha) [...]
[...] Investors are supposed to be “rational” rational when it comes to accessing risk and making investment choices. At least that is what they teach finance students when they study the CAPITAL ASSET PRICING MODEL. Nothing could be further from the truth! [...]
“It seems studio executives are generally betting on the next Titanic, because the very highest grossing movies are R rated.”
Ah, you would think that wouldn’t you….but you would be wrong.
Movies are made for one reason-to consolidate and spread cultural power. This is done by what type of film? R Rated. Hollywood does not care if 20 R Rated films bust-as long as they push the cultural extension. The one R Rated hit will cover the 20 losers, but all 20 will push the message.