§The Missing Question
Thanks to the research conducted during my bachelor and master theses, I gradually arrived at a view of finance that differs from the traditional framework taught in most textbooks.
The journey began with questions about valuation and asset pricing. It ended with a more fundamental question:
What if risk itself is not objective?
Traditional finance often treats risk as an intrinsic property of an asset. An asset has volatility. It has beta. It has liquidity risk, credit risk, duration risk, and countless other measurable characteristics. Investors observe these characteristics and decide whether the expected return is sufficient compensation.
There is undeniable value in this framework.
Yet it implicitly assumes that risk exists independently from the observer.
I believe this assumption is incomplete.
Risk is not a property.
Risk is a relationship.
More specifically, it is the relationship between an asset and the individual exposed to it.
Traditional finance asks:
What is the risk of this asset?
A more useful question may be:
Risk to whom?
The difference appears subtle, but it changes everything.
A pension fund, a sovereign wealth fund, a hedge fund, a family office, an entrepreneur, and a retiree may all examine the exact same asset and arrive at completely different conclusions.
The usual explanation is that they disagree about future cash flows or expected returns.
But often they do not.
What differs is not necessarily their forecast of the future.
What differs is their position in the world.
They carry different liabilities. They face different constraints. They have different liquidity needs, different obligations, different tolerances for uncertainty, and different time horizons.
The consequences of being wrong are radically different.
The same asset enters a different reality every time it changes owner.
An illiquid business may be highly risky for a leveraged investor facing a potential margin call next month, yet almost riskless for an investor with no leverage and no intention of selling for twenty years.
Nothing about the asset changed.
The risk changed.
Or perhaps more precisely: the asset never contained the risk in the first place.
The risk emerged from the interaction between the asset and its owner.
§The Many Dimensions of Risk
Once risk is understood as relational rather than intrinsic, another realization follows naturally: risk cannot be universal because people do not experience the future in the same way.
Time is perhaps the clearest example.
A short-term investor and a long-term investor are not evaluating the same opportunity. A temporary decline in price may be catastrophic for someone whose liabilities arrive next year and almost irrelevant for someone investing for the next thirty years.
Liquidity offers another illustration. For some investors, the inability to sell quickly can become an existential threat. For others, temporary illiquidity is little more than an inconvenience.
What appears risky to one participant may barely register as risk to another.
The same pattern appears in value investing. Many opportunities require years before market expectations and business reality converge. To a short-term investor, that waiting period is itself a major source of risk. To a patient investor, time is not the source of uncertainty; it is the mechanism through which value emerges.
The future arrives at different speeds for different people.
Consequently, risk changes with horizon.
But horizon is only part of the story.
Nassim Taleb, through the concept of skin in the game, highlights another dimension that is often overlooked. People do not merely possess different information.
They occupy different positions within reality itself.
The entrepreneur whose wealth is concentrated in a single company experiences uncertainty differently from the diversified shareholder. The lender experiences risk differently from the borrower. The employee differently from the owner.
Beliefs matter.
Consequences matter.
Exposure matters.
Skin in the game matters.
Two individuals can look at exactly the same facts and arrive at very different assessments of risk without either being irrational.
Not because one understands reality better than the other.
Because they are standing in different places within it.
What they are evaluating is not merely the asset.
They are evaluating the interaction between that asset and their own circumstances.
Risk depends on horizon, but also on wealth, obligations, incentives, beliefs, preferences, experience, and exposure.
Risk is not only horizon-dependent.
It is context-dependent.
It is perception-dependent.
Ultimately, it is subject-dependent.
§From Subjective Risk to Subjective Prices
The implications for valuation are profound.
Most valuation frameworks implicitly assume that disagreement arises because investors disagree about future cash flows.
One investor forecasts stronger growth.
Another forecasts weaker growth.
One buys.
One sells.
The disagreement appears to concern expectations.
But expectations are only half of the equation.
Two investors can agree entirely on future cash flows and still arrive at radically different fair values.
Why?
Because they do not face the same risks.
The future cash flow interacts differently with their circumstances, liabilities, objectives, preferences, and horizons.
The discount rate, therefore, cannot be entirely objective.
And if the discount rate is not universal, valuation cannot be universal either.
The search for the one correct price becomes misguided.
The better question is:
For whom is this the correct price?
The answer can legitimately differ from one investor to another.
And all of them may be rational.
§Conclusion
The traditional view of finance treats risk as an objective feature waiting to be measured.
A more complete view is that risk is relational.
It emerges from the interaction between an asset and a particular individual.
The asset may be objective.
The future outcome may be objective.
The exposure may be objective.
But risk is not.
Risk depends on horizon.
Risk depends on circumstances.
Risk depends on beliefs.
Risk depends on preferences.
Risk depends on skin in the game.
Change the person and you change the risk.
Change the risk and you change the price.
This leads to a simple but far-reaching conclusion:
There is no single fair price because there is no single risk.
Different prices do not emerge merely because investors have different assumptions.
They emerge because investors inhabit different realities.
The plurality of prices observed in financial markets is therefore not a market imperfection.
It is the inevitable consequence of human heterogeneity.
Asset pricing is not merely a theory of cash flows and discount rates.
It is a theory of human circumstances.
And the same future, viewed from different positions, naturally produces different risks and different prices.