Moral Arbitrage: The Biggest Unpriced Risk in Capital Allocation
What does allocator indifference actually sound like in the wild? Read the direct quotes
Yesterday, I published a piece on the real financial risks of anti-semitism and scapegoating in U.S. markets. The responses were revealing, none more so than this comment from an institutional LP.
His words aren’t an outlier; they’re a window into how allocators rationalize looking away from civilization-scale risk until it’s too late:
“We have made a decision to continue investing in Israeli deals, knowing the elevated risks. Why? Because the concentration of quality is high, and the geopolitical risks include too many edge cases (eg. WWIII) to be modeled in any meaningful way... As for the targeting of successful Jews, this is tightly linked to the broader attack on our research institutions. We are shifting our investment focus...away from the U.S. toward other countries. After a four-year pause in China, we are gearing up to re-engage there, because...that provides a contrarian opportunity.”
This isn’t just one comment or one LP. It’s a textbook example of how capital markets justify not pricing systemic risk until after the crash.
The LP frames every existential threat: anti-semitism, collapse of research institutions, even U.S. social stability - as “unmodelable edge cases.”
This is how risk becomes systemic, and then unmanageable.
The result? He reallocates capital, not to mitigate risk, but to find the next short-term arbitrage.
“There are also risks and opportunities brought on by mass deportations. We are stepping up our interest in robotics for medical and personal care...However, we are reassessing the viability of service businesses which are not well positioned to adjust to a near-term sudden loss of workers.”
Translation: He’s watching social collapse, sees displaced workers as an opportunity to invest in automation, and shrugs off the human toll, because there’s money to be made in the aftermath.
Why This Is Fiscal Malpractice
This LP isn’t alone. Allocators have used this playbook for decades. The result is always the same: catastrophic losses, destroyed ecosystems, and markets left holding the bag. This isn’t “contrarian.” It’s a self-fulfilling prophecy of value destruction.
1. Anti-Semitism & The Innovation Exodus
The LP:
“As for the targeting of successful Jews, this is tightly linked to the broader attack on our research institutions. We are shifting our investment focus...away from the U.S. toward other countries.”
The Value Destruction Pattern:
Every allocator who shrugs off targeted scapegoating of high-contribution communities as “just another risk” is repeating history’s costliest error.
The 1930s brain drain from Germany, when Jewish scientists and entrepreneurs were forced out, set German science and industry back by decades.
The direct cost? Trillions in lost GDP and IP, captured by America and the UK.
Today:
Jewish founders have driven more than $3.1 trillion in U.S. enterprise value (Google, Meta, PayPal, OpenAI). If allocators ignore the signals and let antisemitism push this talent out, they aren’t “being contrarian.” They’re repeating the exact arrogance that destroyed German capital markets.
Estimated cost: Even a 10% “innovation exodus” could mean hundreds of billions in lost future returns, unicorns, and IPOs over a single fund cycle.
2. Climate Change & Stranded Assets
The LP:
“The geopolitical risks include too many edge cases (eg. WWIII) to be modeled in any meaningful way...that provides a contrarian opportunity.”
The Value Destruction Pattern:
This is the same logic that kept capital in coal, oil, and gas for decades after the risks were obvious.
“Too complex to model.” “Let’s be contrarian.”
Meanwhile, asset write-downs and forced divestments wiped out more than $150 billion from balance sheets in the last decade alone. Early exiters (who modeled the risk and acted) captured the only real alpha, while laggards paid for the privilege of being “contrarian” right into insolvency.
Today:
Climate tail risk (the chance of a rare, extreme event that falls far outside the “normal” range of what usually happens) is now consensus. The “contrarian” play turned into being the last bagholder, every cycle.
3. Opioid Crisis & Social Cost Offloading
The LP:
“There are also risks and opportunities brought on by mass deportations...we are reassessing the viability of service businesses which are not well positioned to adjust to a near-term sudden loss of workers.”
The Value Destruction Pattern:
This is textbook allocator thinking:
“Yes, mass suffering, but, hey, what’s the trade?”
The opioid epidemic was fueled by years of capital ignoring warning signs in pursuit of “risk-adjusted” returns.
The bill? Over $30 billion in direct pharma shareholder destruction (Purdue Pharma, McKesson, others), more than $1 trillion in broader economic cost, and a permanent stain on every fund that failed to act.
Today:
The same logic—treating human collapse as an “opportunity” for automation, rather than a systemic risk to portfolios—guarantees more value destruction ahead.
The Wrap:
This isn’t just a one-time ethical lapse.
It’s fiduciary failure on a historic scale.
The numbers prove it:
Anti-semitism risk ignored: Hundreds of billions lost in talent flight and value destruction.
Climate risk ignored: $150B+ wiped out in stranded assets.
Opioid crisis ignored: $1T in economic cost and $30B in shareholder losses.
If you think allocator moral arbitrage is “contrarian” or “rational,” look at the financial crater left behind. The real risk isn’t early action—it’s waiting until the market makes you care.
The problem of looking at it as a systematic issue is that individual investors invest based on their own well-being. Those who do not do this end up losing against those who do this. To be more clear, it is a fundamental flaw of the competitive nature of the pure capitalist system that it leads to a small number of extremely wealthy people and a large number of poor people with a big gap in the middle.
The solution is good governance from good government. However, the capitalist system gone awry fails to compensate with good governance. This is a lesson we sort of learned in the 1920s, and then forgot and undid in the 1990s and 2000s and through today. By destroying good governance and good government, we created these situations. And in order to fix them, we need to return to good governance and good government.
In terms of the investors, they are just doing their jobs as well as they can by following the rules and seeking to optimize their returns.
These were my comments, and you deliberately misconstrued them. When I cited the moral dimension of the problem, you dismissed me as veering into sociology, rather than hard-headed capital allocation. When I cited instances where we are in fact responding rationally to certain risks, you now suggest we are ignoring human costs. We continue to invest in Israel in part because abandoning Israel (as the Boycott movement would have us do) would just would be surrender. One cannot divorce the math from the human element.
Certain edge cases, like WWIII, do not warrant modelling. What is the point? Our actions only matter if the world is still here tomorrow. We have to act on that premise.
I would give a lot to stop the mindless deportation of our service workers; meanwhile, our nursing homes will need staff. If the current political climate does not reverse, someone still has to provide the care. Investing in robotics to fill the gap is not moral evasion, it is solving a problem we wish we didn't have to. Meanwhile, in my life as a citizen I will oppose the current administration's policies. But, I forgot, that is letting sociology get in the way of rational allocation!
So which is it that you are advocating? Hard-headed, "rational" allocation, or moral and social responsibility? It is not one or the other. We are looking for the opportunities to do both. If you needed a straw man to make some sort of point, have at it. We are anything but indifferent, and I think you know better.