risk
Ruin is an absorbing state
The rule
You cannot come back from zero. Avoiding the wipeout matters more than chasing the best average, because ruin has no return trip.
Where it flips
Guarding against ruin too hard has its own cost: cash sitting idle and growth missed. Where it misleads: you turn fearful and never invest. The fix: the skill is careful sizing, not panic.
A plan with a great average return, but a small chance of total loss, will hit that loss if you play long enough. And then the game is over for good. There is no bouncing back from zero. Survival is the one thing every other return depends on. Stay alive first.
A worked example
A borrowed-money book grows 25% a year, but carries a 2% chance of a total wipeout each year. Over 20 years, ruin becomes more likely than not. [illustrative]
How to spot it
- ·any path that can reach zero
- ·borrowed money that forces you to sell at the bottom
- ·a position so big that one fraud could finish you
Nassim Nicholas Taleb · Fooled by Randomness / Skin in the Game