i think there’s a difference between what is being referred to as financial nihilism and ordinary risk-taking. i think “financial nihilism” is a close analog to an older debate about “increasing marginal utility” among the poor. 1/

the distinguishing characteristic is that under some circumstances it makes sense to take risks not that have high volatility compensated by high expected value, but risks that have negative expected value compensated by long right tails, ie the “risk” compensates expected loss. 2/

in conventional finance, this is a characteristic of out-of-the-money options, but out-of-the-money options trade approximately at expected value, while “financial nihilists” pay (and arguably reasonably pay) more than expected value! 3/

the explanation is that there’s nonlinearity in welfare terms in that right tail. 4/

ordinary returns don’t let people escape a kind of gravity well of low welfare, but above some threshold, there’s the possibility of escape velocity, so people behave as if money in the far right tail is worth even more than its high amount would suggest. 5/

@jburnmurdoch.ft.com suggests homeownership as that escape, but i think the phenomenon is more general. /fin