However, it would be delusional to think that plunging head first into peril should result in a positive payoff. You don’t simply go to war with no knowledge of the lay of the land and no strategy, carelessly believing that your chances of success increase with courage. Even the skilled hunter makes a careful study of his prey, knowing full well that the tables can easily turn.
Eyes wide shut
It goes without saying that taking a risk is something that you only do when you have a competitive edge and in the right context. So where did the idea that to get rich you need to take risk and that risk taking begets higher returns? Unfortunately, driven in part by academic theory, too many investors naively think that simply taking risk generates the pay-off for such risk. This is a problem, as it discourages the type of follow-up that makes risk taking productive in the first place.
Wrong turn
To understand this problem, we need to look at the history of what is known as the standard model of portfolio theory. The standard model came into existence

during the boom period of the last century in financial markets research during the 1960s and early 1970s. The coming together of two forces resulted in a model known as the Capital Asset Pricing Model (CAPM), which would occupy a lot of academic energy for another 40 years.
These two forces were:
1. The publication of seminal works of Markowitz (1952), Sharpe (1964), Lintner (1965) and Mossin (1966), and
2. The creation of the first ever comprehensive database of historical stock prices by researchers at the Centre for Research in Security Prices (CRSP) at the University of Chicago. This database demonstrated that the aggregated stock indexes had earned a sizeable return premium of 5% over treasury bills over the 1926 to 1962 period. This seemed to confirm a pre-diction by the theory. It is important to note that this return premium occurs in between asset classes. The basic claim of the standard model was that the expected return on any security is a linear and increasing function of its risk, in turn defined as its co-variation with the ‘market’ portfolio.

A large amount of empirical work followed until finally, 20 years later, it was properly refuted by Fama and French (1992). They proved that in-creasing risk was empirically associated with decreasing returns, when we look within common stocks as an asset class.
The Standard Model – epic fail
Fortunately for scientific progress, we are now living in perhaps the second most highly fertile financial markets research period since the beginning of portfolio theory. The financial crash of 2008 served up a very strong test of the standard model and it failed the test miserably. Grouped together under the term “low volatility anomaly”, there has been a resurgence in interest in the ex-act nature of the payoff to financial risk taking.
Cause and effect
The effect does not show up in stocks only. Eric Falkenstein (2012) presents practical evidence for an inverted risk-return relationship in 17 asset classes. In his introduction he says: “No other article, paper, or book puts all this evidence together, primarily because no one thinks this general absence of a positive risk-return relation implies it might not actually be there.” What about South Africa? It has been known for a while that low risk stocks on the JSE have nearly double the average monthly return compared to high risk stocks over an extended period of time (Van Rensburg and Robertson, 2003). But what about getting the balance right?

Finding a balance
The now useless standard model assumes that people are paid to withstand a universal undesirable. For example, like receiving an amount of money for every courageous extra minute you leave your hand in hot water. Those who have the highest pain tolerance achieve the highest returns on average. In contrast, throughout life we understand that courage is productive only if balanced with caution, which takes into account your special capabilities for your opportunities. There is no linear ‘courage premium’.
The myth lies in moving too hastily from the particular to the general. Some risk taking in a specific context, in a specific way, yields a positive payoff. This does not guarantee a positive payoff for all risk taking in general. Instead, mindless exposure to risk is the path to financial ruin. This is the central message from those who have uncovered the low volatility anomaly. Fifty years of evidence from stocks and additional evidence from 17 other asset classes must surely re-classify an observed empirical effect from anomaly to norm.
Those who possess a stronger survival instinct should sit up and take notice.