Howard Marks: You Think You Can Measure Risk? Think Again | Talks at GS 2022

[Transcript]

KATIE KOCH: A follow-up question on risk is that you—you think that there is a—subjective judgment is a useful tool in managing risk. I just want to ask you the opposite of that, which is that do you think that there's value in using quantitative tools to measure and manage risk?

HOWARD MARKS: No, I really don't. We don't do it at all. First of all, what is risk? It's the probability of a negative event in the future. What do we know about that? What does the past tell us about that? The past has relevance, but it's not absolute. And by the way, I was talking about epiphanies before, to digress if I may.

KATIE KOCH: Yes, you can. It's your show.

HOWARD MARKS: So, I was writing a memo in '06 called Risk. And I sat down at the word processor, and I wrote what I always believed is that risk cannot be quantified. And that's one of the reasons why I don't believe in models. Because risk, being the probability of a bad event, can't be quantified in advance. You can have an opinion. You can state it as a number. But that's not quantification. Quantification is measurement. And the probability of a negative event in the future cannot be measured.

And then I wrote something. You know, you hit the carriage return. And for the next section, I wrote of something that I'd never thought of before. Risk cannot be quantified, even after the fact. You buy something for a dollar. A year later you sell it for two. Was it risky? Any answers? No. You can't tell. Was it a crazy thing where you got lucky and doubled your money? Or was it a really clever thing that nobody else had figured out where you were sure to double your money? And the answer is you can't tell.

No, I don't think risk can be measured. I don't think the past is absolutely applicable. In fact, the big money is lost at the juncture when the past stops being applicable, which happens eventually. I don't think that the possibilities in the future can be synthesized into inputs that are sufficient to let a computer decide what's risky or not.

Source: https://www.youtube.com/watch?v=wkJXQ46ma8I&ab_channel=GoldmanSachs

 

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