Blindfolded and Bear Sprayed
I don’t know what it says about us, but we come up with some pretty crazy hypotheticals at Permanent Equity. For example, one day at lunch (shoutout Chef Alane) we talked about how much someone would have to pay you to let them hit you with bear spray. We even thought about stress-testing the idea by starting a bear spray pool – people could throw cash in until someone agreed to be sprayed in exchange for the pot. (We didn’t actually do it.)
Not long after, our BD associate Holly and I were talking about risk tolerance and how hard it is to price risk and so I asked how much I would have to pay her to jaywalk across 10th Street in front of our office blindfolded on a weekday afternoon. She thought about it, but also wanted to know what others would say, so I posted the question in Slack.
The range of responses was wild. Kristi from 10th St., for example, said zero because she trusted drivers to stop. And our CFO Nikki only said $500 because she also trusted her hearing. Our CLO Taylor, on the other hand, said $2M because that’s what he estimated he would need to cover medical bills and litigation if something bad happened (noting further that his litigation would be directed at me for coming up with this stupid scenario). Holly, for her part, reasoned it out similarly, but landed on $30K because that was what she determined was the average cost of dealing with moderate car-crash injuries.
So there you go: people at Permanent Equity would require somewhere between nothing and $2M to cross 10th Street blindfolded. If you’re ever planning on visiting us, keep that in mind.
What’s interesting about these two hypotheticals – the bear spray and the blindfolded street crossing – is the difference in their range of possible outcomes. With bear spray, you know it will hurt, and hurt for hours, but you also know you’ll live. It’s range-bound. So while people might have varying prices to get bear sprayed, those prices won’t vary that much.
Crossing 10th Street blindfolded is a different story. That’s because there’s a very high probability you would make it across just fine. There’s not that much traffic, you might listen for cars, and drivers might stop. That’s the logic that led Kristi to say no payment was necessary. But the downside isn’t range bound. Because you could step out into the street just as some maniac whose van is on fire is speeding down the street and that would be that. That’s tail risk, and it’s almost impossible to price.
This is the point I was trying to illustrate to Holly. That risk tolerance really isn’t about how much pain someone is willing to endure, but about how they reason through being compensated for having exposure to unlikely but catastrophic outcomes. Because when the question was turned back on me, I said that crossing 10th Street blindfolded was maybe one of those things I wouldn’t do.
– Tim
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