[smogcutter]

> A high-risk high-reward investment model may still produce higher rates of returns than a low-risk low-return model.

So, this isn’t really my area, but if the market is efficient shouldn’t these come up about the same over a long enough period? In other words if one or the other has dramatically better returns that just means the risk was mis-priced to begin with.

The immediate objection I can see to this (without expertise) is assuming that private markets are at all efficient. But that would point to a fundamental problem with pricing in private markets, not the merits of one strategy or another.

[ClumsyPilot]

Behavioural economics dominates the messy real world. Especially when we are talking about startups, new technology that is poorly understood, etc. These are the leading edges of the markets, they are the least efficient of all.

Cue theranos on one hand and probably many companies with potentially profitable innovations that never got funded and we never heard of.

This is one thing that the left social justice crowd does get right - Never forget that at the end of the day, the system runs on wetware - people with faulty ideas, preconceptions, biases and limited knowledge.

[whack]

In an efficient market, investments that are more risky will produce higher returns. If they didn't, no rational investor would invest in them. Why invest in a venture that is more risky, unless you're compensated via higher returns.

You can already see this playing out in the public markets. Stocks produce far higher returns than corporate bonds, which produce higher returns than treasury bills.

There's further nuance here around systematic risk vs unsystematic risk, but I don't think it's as relevant to VCs since their number of investments is too small to diversify away all unsystematic risk.

[smogcutter]

The point is that risk = higher return is an oversimplification. What that risk means is a significant chance of a much lower return. So if a basket of risky assets predictably overperforms... it isn’t actually that risky. Prices should rise in that case (and returns fall).

Having a higher potential return and actually being +EV aren’t the same thing. Just ask any bookie.

[whack]

> The point is that risk = higher return is an oversimplification. What that risk means is a significant chance of a much lower return.

Well yes. This is exactly why higher risk generates higher EV in an efficient market. Because of the significant chance of lower returns.

> So if a basket of risky assets predictably overperforms... it isn’t actually that risky

Depends on your time horizon. The S&P 500 predictably generates higher returns than T-Bills, over a 100-year time horizon. But it is still very risky to a 70 year old retired pensioner. This risk is why the S&P 500 generates higher average returns than T-Bills