I recently attended Foord Asset Management’s Mind of the Manager event which was kicked-off by MD Paul Cluer.
Paul reminded us of the story of Pascal’s Wager, and illustrated how Foord apply the philosophy of Pascal’s tale to how they manage money.
Recap: Pascal’s Wager
Blaise Pascal was a 17th-century French philosopher, mathematician and physicist who was active, inter alia, in writing on probability theory. Pascal’s wager looks at the consequences of making the wrong decision and suggests that humans bet with their lives whether God exists or not.
Pascal argued that a rational person should live as though God exists and seek to believe in God. If God does not actually exist, such a person will have only a finite loss (some pleasures, luxury, etc.), whereas they stand to receive infinite gains (as represented by eternity in Heaven) and avoid infinite losses (eternity in Hell).
Pascal’s Wager & Investing
Applying this principle to investing, Cluer said that at Foord they are very mindful of the fact that the consequences of alternatives must dominate the probabilities of the outcomes. In short, it presents a way of dealing with uncertainty by assessing not only probability but also the magnitude of potential losses gains against possible gains. Where the consequence of an action is severe, even where the possibility of it occurring may be low, you avoid it.
I think that, when it comes to looking after my own investments and in particular when it comes to advising my clients, it is important to bear Pascal’s Wager in mind and weigh up the magnitude of potential gains against the potential losses.
If the potential loss from a decision is more than a person has the capacity to recover from over a particular time period – even if the possibility of it occurring is low – then no matter what the potential upside might be it’s just not worth it.
The thoughts above are my own and not those of Paul Cluer or Foord Asset Management (to whom I owe the thanks for reminding me of the concept).
This post was updated on 28 September 2017.