We are collectively horrible at calculating risk. Our brains just aren't equipped to deal with risk in the modern sense of the word. Risk is no longer the tusk of an elephant or the claw of a bear, it's buying a mortgage-backed security in 2007 or stuffing a 64-bit floating variable into a 16-bit integer.
Calculating risk ultimately means predicting the future by looking at the past. But the past is an unreliable indicator at best. So here's a bold idea. Let's not use risk to make the decisions that navigate us through life. Instead, let's examine decisions in terms of their asymmetry.
Some decisions have much more upside than they have downside. One recent example is Tesla buying $1.5 billion worth of Bitcoin.
- Worst-case scenario? Bitcoin goes to zero and they lose 8% of their liquid assets. Painful, but not life-threatening.
- Best-case scenario? Bitcoin increases in value until who-knows-what-price and Tesla makes a huge amount of money. The upside is almost unlimited.
This isn't meant to advocate Bitcoin. It's meant to show an unusual example of a decision that has little downside and enormous upside. Other examples are exercising every day, getting enough sleep, telling your parents you love them, etcetera.
Of course, some decisions have much more downside than they have upside. Yet we still make those decisions. We still drive too fast, even though it could cost our and other people's lives. We still check social media too often, even though too much screen time is terribly harmful for us.
Throughout life, we frequently arrive at crossroads of important decisions. Don't try and calculate risk. Instead, play it very safe where the downside is high and the upside is low. Play it risky where it's the other way round.
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