Quantifying Risk

Quantifying Risk

Ronald Howard, A Stanford professor, introduced the “micromort” in 1980 to measure the impact that particular behaviors have on the risk of death. He assessed individual actions and decisions at a very small scale to see how it all adds up, by utilizing a microprobability (a one-in-a million chance of some event) to quantify how risky any particular behavior would be.  By looking at the history of exposure to an action and attributable deaths during that exposure, we can say how many in a million would have died if they had been behaving that way. This gives the micromorts, or additional risk associated with that behavior.

For example, many people would consider skydiving to be pretty risky behavior. Does the data say otherwise? The United States Parachute Association has compiled the number of deaths and estimated jumps in the US for almost 50 years for their members, and their data shows fewer fatalities every year based on 100,000 jumps as the sport has gotten safer and safer, but there still are some accidents. USPA members made approximately 3.57 million jumps and USPA recorded 10 fatal skydiving accidents in 2021. In terms of micromorts, we would divide the total jumps (or exposure instances) by 1 million, and then divide the fatalities for those jumps by that number to find out the number of fatalities per million. In this case, it would have added ~2.8 micromorts of risk to go skydiving once in 2021. If we combine the data from earlier years (when it was not as safe), the number of micromorts is closer to 8.

How does that compare to other behavior?

Ronald Howard presented data that was archived by Wikipedia relating certain behaviors to a single micromort. Some of the activities are fairly common, such as traveling 150 miles by car (death by accident) to activities that are more unusual like spending one hour in a coal mine (death from black lung disease).

So- if we consider something as commonplace as driving, it would only take 420 miles to achieve the same micromorts as it did to jump out of a plane in 2021 (2.8). For some, that’s just one week of commuting to the office!

Among other interesting risk factors analyzed that add a single micromort are smoking 1.4 cigarettes, drinking .5 liter of wine, living 2 days in New York or Boston in 1979, and eating 100 charbroiled steaks.

If I understand micromorts, should I change my behavior?

Not necessarily. Micromorts are an interesting method of statistical analysis, but they are only a single metric among many important considerations when making a decision. Something may be better because it’s cheaper, more fun, tastier, or any number of things that could make that additional risk worth taking.

Some risks can be mitigated as well. For example, a motorcycle is one of the riskiest methods of travel in terms of micromorts, but for some it is accompanied by a great deal of pleasure. Perhaps if one were to decide to take on that risk, one could add a helmet into the mix, and also an airbag jacket (it’s a wearable jacket that monitors the rider and provides airbags around their chest should they get into a collision). Should everyone undertake precautions, the statistics on micromorts for the dangerous activities might decrease, as they have over time in the skydiving measurements.

Is similar risk analysis available for investment portfolios?

Similar to micromorts, previous performance cannot predict future results. History does have lessons to teach. One can back test a mix of assets given a particular time window and financial market history. By comparing multiple time frames, let’s say of 1, 3, 5, 10, and 30 years, one can try to understand how much risk is associated with different mixes of portfolios given the amount of time they could be in the market.

Some risks are mitigated by having an experienced partner. For example, in the skydiving example above, tandem skydiving (where you’re attached to an experienced skydiving instructor for your jump) had a far better safety rate, with one student fatality per 500,000 jumps on average over the past 10 years. This would bring the added micromorts down by over 2/3 for tandem skydiving vs. individual skydiving for the same time period.

Even if statistically some moves seem like the best ones, it’s most important to understand how everything fits into your unique situation. At Garden State Trust Company, we understand that your desires and capabilities will vary from the next person, and your portfolio should match your time horizon and appetite for risk. If you’re interested in a second opinion on your portfolio, please reach out. We’d be pleased to share our expertise and methods on how to mitigate risk in an investment portfolio.