What colour is the dress?

 What colour is the dress? Not long ago, there was a viral Internet sensation about a dress. Depending on your brain’s wiring, you either saw it as one colour or another. It was similar to the twirling figurine, you either saw it going clockwise or anticlockwise!

 

Which do you see, downside risk or opportunity? It appears that, in a given situation, depending on your wiring, you either see downside risk or opportunity.

 

In any situation, particularly in business, we know that risk and return are intertwined. The risk arises out of the fact that in any risky asset, the expected returns are likely to be different from the actual returns, upwards or downwards. I am, however, concerned here with the likely downside risk. The higher the downside risk, the higher the expected or demanded return, and vice versa.

 

So, which strategy should you pursue? Drive down downside risk or seek a higher return? There are dangers lurking in both directions. Seeking to lower downside risk close to zero may result in missing opportunities with the highest returns, while on the other hand seeking ever higher returns may lead to reckless investing. Remember also that risk does not imply certainty, it comes with a probability of occurrence, while expected (risky) returns are also not always guaranteed.

 

Strictly speaking, of course, it bears mentioning that risk in general, downside or upside, is also dependent on your vantage point. For example, looking at a firm, are you an investor or a manager? It bears mentioning, as well, that if you seek to lower your downside risk to zero, then you don’t go to Mars, neither do you build a Tesla or an iPhone, as they are all very risky ventures!