Everyday Economics

“Assumptions and intentions may hold true, or they may fail; that’s the reality of uncertainty.”

Returns don’t happen overnight – investments need to be thought up, designed, optimized, and implemented over a period of months, years, or even decades. And since these investments are designed with certain constraints and assumptions in mind, it throws a wrench into things when these constraints and assumptions change.

In simple (and admittedly ridiculous) terms, let’s think about mullets.

At the time of writing, the mullet is the epitome of style – business in the front, party in the back. All the Kardashians are sporting them, and your partner is begging you to grow one out. Your hair is currently short, but sufficiently motivated by peer pressure, you decide to go for it. You let the back lengthen and visit the stylist every week to trim the front. Month by month, your hair grows towards your ideal mullet look, until finally, one year post-mullet decision, you show up to work rocking your perfect ‘do.

It’s only when you arrive at the office that you notice your coworkers aren’t wearing mullets anymore. It seems everyone has shifted to bowl cuts because apparently, that’s what’s ‘in’ right now. Even the Kardashians have them. In your obsession with achieving the perfect mullet, you failed to notice shifting trends, and now, one year later, you’re stuck with an uncool hairdo.

Personally, I sport neither a mullet nor a bowl cut, although I have been known to embrace a perm when the mood strikes.

But the point here has little to do with hair and much to do with the timeline of decision-making, investment, and return.

In our hairy tale, you had to make a decision about your style. If you could snap your fingers and instantly transform your look, there’d be no issue – you could rock the mullet while it was cool and switch to the bowl cut when trends shifted.

Similarly, if you could take the information available at any given moment, snap your fingers, and immediately realize an investment and its associated return, the financial world would be wonderfully simple (and many people with my degree would be out of a job).

But it’s not that simple.

Because just like hair, investments take time to grow. And often, you’ll find that you can’t redistribute your assets on a whim, just as you can’t immediately switch from a perfect mullet to a perfect bowl cut – it just doesn’t work that way.

Note: If a hairstylist disagrees, feel free to leave your opinion in the comments- I’m always open to expert hair advice.

But when desired outcomes or constraints shift during the course of an investment, it complicates matters significantly. This is a crucial point when thinking about finance.

How much flexibility do you leave yourself to make changes when circumstances shift? Do you double down on a good bet? Are you sure the mullet will stay cool a year from now, or are you already aware of trends shifting towards the bowl cut?

Or, if you’re the stylist, would you be confident enough in your knowledge of hair and trends to pinky promise that the mullet will still be cool a year from now? And is that really so different from a financial manager giving out investment advice?

As such, the world is not so simple, and financial managers can make a good living.

Of course, there are questions we can ask to reduce the associated risks:

• Is there a specific way to grow your mullet that makes it easier to shift to a different hairstyle down the line? Or a way to construct your assets that allows for easy portfolio modification?

• Should you skip the mullet altogether and go for a slightly less popular style that allows for more flexibility and transformability? Perhaps you can settle for a lower-return index fund with lower volatility?

• Do you subscribe to Hairstyles Weekly to ensure you’re on the right track and keeping up with the latest trends? Maybe reading the latest news from Bloomberg can help you keep up with financial trends as well.

Whether we’re talking about hair or finance, the game isn’t so different. Decisions are made with certain assumptions and intentions in mind, balancing an optimal rate of return with minimal risk. Those assumptions and intentions may hold true, or they may fail; that’s the reality of uncertainty.

So, when making decisions – whether about assets or hairstyles – how can you structure them in a way that maximizes flexibility without compromising returns?

It’s not an easy question, but answering it might just save you from the embarrassment of walking into the office with an outdated mullet – or a subpar investment strategy – somewhere down the line.