The Zurich Axioms: The Rules of Risk and Reward Used By Generations of Swiss Bankers

The Zurich Axioms: The Rules of Risk and Reward Used By Generations of Swiss Bankers
The Zurich Axioms: The Rules of Risk and Reward Used By Generations of Swiss Bankers

Book review  of The Zurich Axioms, by Max Gunther

The Zurich Axioms” is a slim book that should be on the library of every investor and, perhaps, entrepreneur and manager. It is a book about risk management. The book delivers a collection of principles about how to deal with risk (12 major and 16 minor axioms). The axioms are a sort of rule of thumb for dealing with risk. Curiously, in a way, the axioms are more about dealing with the limitations of the human psyche than with investments.

Max Gunther (1927-1998) was a journalist and writer born in England. He lived most of his life in the United States. He worked and wrote for magazines like Business Week, Time Magazine, Playboy and Reader’s Digest.

Risk is part of our life either we want it or not. Even if we try not to assume any risk, it will “bite” us sooner or later. Perhaps the biggest risk in the long run is not to assume ever any risks. Perhaps the most foolish thing to think is that we are always in control. Things are never in control, at least completely.

“The Zurich Axioms” says that we should embrace risk. Without some risk we can´t reap the rewards of this life. On the other side, we shouldn’t be fools when taking risks. The Zurich axioms is way to deal with risk in a smarter way.

Briefly, the Zurich axioms are the following:

  • “On Risk – Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough (always play for meaningful stakes / resist the allure of diversification).
  • On Greed – Always take your profit too soon (decide in advance what you want from a venture, and when you get it, get out).
  • On Hope – When the ship starts to sink, don’t pray. Jump (accept small losses cheerfully as a fact of life. Expect to experience several while awaiting for a large gain).
  • On Forecasts – Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.
  • On Patterns – Chaos is not dangerous until it begins to look orderly (beware of the historian trap / beware of the chartist’s illusion /beware of the correlation and causality’s delusions / beware of the gambler´s fallacy).
  • On Mobility – Avoid putting down roots. They impede motion (Never hesitate to abandon a venture if something more attractive comes into view).
  • On Intuition – A hunch can be trusted if it can be explained (never confuse a hunch with a hope).
  • On Religion and the Occult – It is unlikely that God´s plan for the universe includes making you rich (If astrology worked, all astrologers should be rich / a superstition need not be exorcised – it can be enjoyed, provided it is kept in its place.
  • On Optimism and Pessimism – Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic).
  • On Consensus – Disregard the majority opinion. It is probably wrong (never follow speculative fads. Often, the best time to buy something is when nobody else wants it.
  • On Stubbornness – If it doesn´t pay off the first time, forget it (never try to save a bad investment by averaging down).
  • On Planning – Long range plans engender the dangerous belief that the future is under control. It is important never take your own long-range plans, or other people’s seriously.”
  • Some of the readers are thinking that they don´t work all the time. I completely agree. One reason is luck (or the lack of it). It is possible to play a very smart poker (poker is a kind of investment) and still loose. The contrary is also possible: play a very dumb poker and still win. However, neither of the situations is a reason to play a bad poker. Good decisions over time make money flow to the better player.

    The Zurich Axioms, by Max Gunther
    The Zurich Axioms, by Max Gunther

    Another possible reason is to have solid information that contradicts the axioms. For example, Max Gunther recommends “decide in advance what you want from a venture, and when you get it, get out”. If the reader knows something important in advance contrary to the axioms don´t follow them.

    However, I don’t believe that to disrespect the axioms is the most smart thing we can do most of the time. The Zurich axioms are more times right then wrong. Personally, I think if I had followed the Zurich axioms in the last decade I would be, at least, independent financially. Many of my bad investment decisions would had been avoided.

    Even without reading the book, I think most readers would agree immediately with the majority of the axioms. 
    I don´t think it is easy to apply immediately the Zurich axioms. One thing is to understand the rationality of the axioms and agree with them. Other thing, is to apply them to real situations. We are human and we tend to think we know better than the common sense the Zurich axioms represent.

    Perhaps a good idea is to choose two or three axioms that we think can make a real difference in our lives in a short term. And then applying them to our lives. That is what I´m doing in relation to the axioms. Personally, I chose the axioms on risk and stubbornness. Those are the axioms that make more sense to me and I will not explain why 🙂

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