{"id":6640,"date":"2018-04-02T06:04:57","date_gmt":"2018-04-02T13:04:57","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=6640"},"modified":"2018-08-02T13:34:59","modified_gmt":"2018-08-02T20:34:59","slug":"pascals-wage-investment-risk-tolerance","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/pascals-wage-investment-risk-tolerance\/","title":{"rendered":"Pascal\u2019s Wager and Your Investment Portfolio"},"content":{"rendered":"

\"Pascal's<\/a>Blaise Pascal achieved fame and notoriety for several achievements.<\/p>\n

The 17th<\/sup> century French mathematician did ground-breaking work in geometry and probability. He built some of the first computers and lent his name to a programming language. And he made long-lasting contributions as a Catholic theologian.<\/p>\n

He may best be remembered, however, for Pascal\u2019s wager: an argument for believing in the existence of God.<\/p>\n

Pascal\u2019s wager seems to have little to do with investing.<\/p>\n

But it may help you sort out your thinking if you’re struggling with hard-to-handle investment decisions: expected future returns, your investment risk tolerance, the right safe withdrawal rate and so forth.<\/p>\n

Why? Pascal’s wager suggests a logical way to come to a rational decision about this sort of stuff.<\/p>\n

But let me start with a quick review of Pascal’s wager. And then we can move on and try to apply Pascal’s decision theory to investing.<\/p>\n

Pascal\u2019s Wager: A Quick Review<\/h2>\n

You can read Wikipedia\u2019s description of Pascal\u2019s wager<\/a>\u00a0if you get interested in the details, but essentially Pascal said that people can\u2019t objectively, through reason and logic, figure out whether or not God exists.<\/p>\n

Yet, Pascal said, people do need to make a decision.<\/p>\n

So what should they do?\u00a0Pascal said one needs to look at the outcomes of being wrong.<\/p>\n

In terms of believing in God, Pascal points out that the downside of acting as if God exists if God doesn\u2019t exist<\/em> means someone makes a few decades of sacrifice.<\/p>\n

In comparison, Pascal points out that the downside of acting as if God doesn\u2019t exist if God really does exist<\/em> is losing (according to Christian theology) an \u201cinfinity of an infinitely happy life.\u201d<\/p>\n

Enough religion, but you see the trade-off.<\/p>\n

In some situations, you or I choose between two options. Believing one thing and acting accordingly. Or believing the opposite thing and acting accordingly.<\/p>\n

Sometimes, we can\u2019t really know whether the one thing or the other thing is right.<\/p>\n

And so faced with this conundrum, Pascal says ask yourself which belief if wrong<\/em> is worse to be wrong about.<\/p>\n

We want to avoid that<\/em> choice.<\/p>\n

Applying Pascal\u2019s Wager to Investing<\/h2>\n

The logic of Pascal’s wager works in “either this or that” situations. And many of the hard investing decisions are not\u00a0really<\/em>\u00a0simple “either this or that” situations:<\/p>\n