Over the July Fourth weekend, a friend asked what I thought of a new financial instrument known as a “stock token.” Developed by the online broker Robinhood, they’re designed to let investors buy stakes in private companies such as OpenAI, creator of ChatGPT. It’s a novel concept because private company investments are typically inaccessible to individual investors.

Despite the appeal, my reaction was to urge caution. Why? For starters, these tokens may not perform as expected. That’s because they aren’t the same as actual equity in a company. It’s still an open question exactly what they are.

Regarding the token linked to its stock, OpenAI issued this statement: “These ‘OpenAI tokens’ are not OpenAI equity. We did not partner with Robinhood, were not involved in this, and do not endorse it…Please be careful.”

In an interview, Robinhood’s CEO, Vlad Tenev, didn’t dispute that the tokens “are not technically equity.” But, he argued that, “it’s not entirely relevant that it’s not technically an equity instrument.”

To try to understand it better, you could consult Robinhood’s website. It explains that the tokens are “derivatives tracked on the blockchain that follow traditional stock and ETF prices, giving you exposure to the US market.” In other words, consistent with Tenev’s statement, when you buy one of these tokens, what you’re buying isn’t actual company stock. It may be similar to a stock option, but it isn’t clear.

That complexity is the first reason I’m wary of investments like this. Fortunately, these tokens aren’t currently available in the U.S. Regulations prohibit them. In Europe, where they are available, Robinhood’s regulator, the Bank of Lithuania, has opened an investigation, so that may provide more clarity.

In the meantime, though, there’s a more fundamental reason I’d be wary of investments like this, and it stems from an idea known as Lindy’s law.

Before it closed in the 1960s, Lindy’s delicatessen in New York was a popular gathering spot for professional comedians, and a frequent topic of conversation there was the relative success and career longevity of their peers. Over time, a rule of thumb seemed to develop: Comedians who had been around for a long time were more likely to have many more years in front of them. Newer performers, on the other hand, might or might not last. They hadn’t yet stood the test of time.

In a 1964 article in The New Republic, historian Albert Goldman dubbed this phenomenon “Lindy’s law,” though he was quick to acknowledge that it wasn’t necessarily a blinding insight. He was simply observing that new things need time to prove themselves. But, “despite its awesome air of common sense,” Goldman wrote, Lindy’s law may nonetheless be useful as a guide.

Over time, Lindy’s law has been applied to other fields, and I believe it’s especially applicable in finance. That’s because new financial innovations need to be tested through a variety of different economic environments, and that takes time. Consider, for example, the hedge fund Long-Term Capital Management. Founded by a group of well-known economists, including more than one Nobel Prize winner, it got off to a fast start. In its first year, it returned 21%. In its second year, it gained 43%, and in its third year it delivered 41%. But in its fourth year, an unexpected event in the bond market caused the fund to suffer a catastrophic failure and shut down. It turned out there was a flaw in the fund’s quantitative strategy, but it’s one that an investor looking at the fund’s pedigree and strong early returns couldn’t have predicted.

That’s an extreme example, but it illustrates the importance in financial markets of giving new innovations time to be stress tested. That’s the primary reason I’d be cautious with Robinhood’s new tokens. And it’s for that same reason that I’d tread carefully when it comes to other new inventions, such as Robinhood’s event contracts, which allow people to bet on elections and other events. I’d be similarly cautious with other financial inventions like non-fungible tokens (NFTs), leveraged and inverse ETFs, special purpose acquisition companies (SPACs) and cryptocurrencies. These are all still very new, but they seem to have gained in popularity since the pandemic. A recent writeup in The Wall Street Journal carried the headline “Meme Stocks and YOLO Bets Are Back.”

As Albert Goldman noted, Lindy’s law is largely common sense, but I do think it’s useful in making investment decisions. When we choose to be cautious with newer financial instruments, it’s not because we can accurately predict how they’ll work out. And it’s not because we’re Luddites, reflexively opposed to anything new. Lindy’s law tells us that it’s rational to stick with tried-and-true investments because they’re strategies that have proven themselves through multiple market cycles.

It’s important to emphasize, though, that Lindy’s law is just a guideline, not a rule, and that means there can be false positives. Products like whole life insurance have been around for decades, for example, but they’re still not great investments, in my opinion. So longevity alone is not sufficient to vet an investment.

Lindy’s law may also produce false negatives. It can cause investors to be overly cautious, rejecting anything that’s new just because it’s new. That would be a mistake too. Lindy’s law encourages us to move slowly, but it doesn’t mean we should never invest in anything new or do anything different. As Albert Goldman wrote, “the factors that determine success or failure are a good deal more complicated than the rule suggests.”

Lindy’s law, though, can help us think about risk management. It tells us that when something is new—no matter how logical, safe or secure it may seem—we should be more careful. In situations like that, investing small amounts, or investing incrementally, may make more sense.

In his book Antifragile, Nassim Taleb praises Lindy’s law but notes that “it’s a noisy indicator.” It should be expected to work “on average, not in every case,” he says, and I think that’s the right way to think about it. Indeed, it’s possible that investments that look speculative today may, in time, prove themselves. In the case of Robinhood’s new tokens, I’m still skeptical. But time will tell.​