I never understood this argument. Can someone help ELI5.
From what I understand so far. Owners never took the risk:
- Entrepreneur goes around asking investors to risk their money. So never he does.
- Investors play “law of large numbers”, basically remove the business risk by having diversification.
- Investors only take systematic risk or market risk. Never business risk. For which they get paid (= beta * risk premium).
On top of that, employees took all the risks:
- Employee has to setup his life around the job. Relocation, finding home near work, setting up transportation, kids schools, and friends/family: all optimizing for job efficiency. That requires investment without “law of large numbers”.
- Worker risk is what would be called idiosyncratic risk. They can loose job as soon as business fails with no fallback or diversification. Even without business risk, they can get fired just because! Job is sent overseas, economy went in recession, jobs market has shifted, skillset is outdated, product becomes obsolete, any of those are idiosyncratic risk.
- And the risk is never paid: It's not like if beta is high, you would get a better salary. I would argue, may be higher the beta, lower the salary.
Am I missing something?