We learned in the last post on the Dunning Kruger Effect that our knowledge does not necessarily track our confidence. My knowledge of the unknown is limited and therefore I’d prefer to be prepared for the unexpected. Is that even feasible? Let’s dive into the ultimate unknown, our own and others’ ability to stay alive. None of us think we are going to die tomorrow but there are a number of known and unknown risks that could wipe us all from existence: nuclear war, asteroid collision, volcano eruption, a rapture, global warming, a black hole, or something we haven’t had the capacity to dream up. The Global Challenges Foundation believes there is a 0.05% chance each year we all will die. That’s a 1 in 20 chance we go extinct in our lifetime.
This article isn’t meant to drive fear into your hearts and I don’t trust low probability statistics like the one I just mentioned, but the reality is low probability events do happen and there are ways we can prepare for them. Below are ten tips to prepare yourself personally for future low probability known and unknown events.
- Plan B – Have respect for time and risks that have not been seen recently. For example, a turkey thinks the farmer is his best friend, he cares for her and feeds her everyday. But then Thanksgiving rolls around and the farmer cuts off her head. Just because the turkey hadn’t seen Thanksgiving before and the other turkeys weren’t chatting about it, did not mean the risk was not real. While the turkey may not have the mental capability, we do, and can prepare for the unknown. A few backup plans around minimizing future one off risks include: applying for dual citizenship, learning survival skills, learning self defense, and storing a supply of extra food/water.
- Get a Side Hustle – Respect redundancy and avoid over optimization and specialization. The media likes to idolize those who take massive risks and succeed, but when you look at the aggregate, most massive risks fail. If you have a specialized job you will be better off developing a side hustle. The over the road truck driver who learned to code, or cut hair, will fare better than the one who loses his or her job to autonomous driving and has not developed secondary skills.
- Invest and Protect – Avoid reliance on the prediction of low probability events or payouts. Some Houston Texas flood victims who live in a 500 – 1000 year floodplain have flooded twice in the past 6 years. I am a recent flood victim and our investment in government subsidized flood insurance provided the best returns I’ve experienced in my lifetime.
- Open Your Mind – Beware the uniqueness that remote events bring with them. We haven’t had a world war since I have been alive but it doesn’t mean we won’t have one. If we do, it won’t be similar to the ones of the past. This as a practical measure warns us about scenario planning and stress testing for one-off risks that may or may not have happened before. Have an open mind and be ready to adapt.
- Avoid Leverage – Beware of the motivations and hazards that come along with quick wins like taking out a loan, relying on bonuses, and investing on margin. If a CEO is motivated to do well in the next 5 years they may opt to risk the entire system and your levered investment. Don’t bet what you don’t have, instead, work hard and deserve to be lucky.
- Diversify Your Investments – Volatility has fooled the federal reserve, academics, Nobel prize winners, and the financial system into thinking it is the same as risk. Avoid volatility based risk metrics like Sharpe, Sortino, and Standard Deviation. They cannot help you predict the risk of an event that has not been seen before. Long Term Capital Management Nobel prize winning economists didn’t understand this and leveraged themselves into bankruptcy when Russia defaulted on their debt. In simple terms: save, invest and diversify.
- Save and Invest – Put yourself in a position to benefit from unpredictable events. Save your money so you can expose yourself to opportunities with upside. Angel investments and small biotech firms are more likely to have unexpected errors to the upside (while banks and financial institutions are more prone to a debt crisis or negative error). Put yourself in a position to benefit positively.
- Avoid Bias and Make Your Own Decisions Beware of the physical presentation of risk. When storytelling, most people can frame up a creative and persuasive pitch without risk. Learn to use the decision quality process, it will help you avoid bias and teach you to make your own rational decisions. Check out these two pitches for global cooling/warming, which one is true? Maybe they both are….
- Winter storm Uri brought extended temperatures colder than we have seen in the last 100 years. It knocked out power for almost a week. There is no doubt the temperature has decreased.
- Over the past 100 years glaciers are smaller and the oceans are warmer. Global warming is real.
- Invest In Others – Beware of following recommendations that come from people without skin in the game. If the risks they suggest you take do not affect them in a similar manner, take pause. Do you want career advice from a school counselor you’ve met once and is unhappy in his or her own career? Work hard and invest in others so they invest in you, give skin to get skin.
- Learn voraciously – Keep learning, it doesn’t stop when you graduate high school, trade school, or college. Continue to learn from doing, watching, listening, and reading. Here are the best books I’ve read lately: The Signal and the Noise, Incerto Series and Thinking, Fast and Slow:
- Thinking, Fast and Slow – Daniel Kahneman. This book explains and gives examples of our behaviors and actions which are not rational.
- The Signal and the Noise, Why so Many Predictions Fail but Some Don’t – Nate Silver helps us appreciate uncertainty and teaches us how to cut through the noise to make better predictions. The basis for my opinion on global warming came from this book..
- Fooled by Randomness: Humans tend to view the world as less random than it really is.
- Black Swan: Recognize that there will be unforeseen and extremely unpredictable events in our future, just like in our past.
- Antifragile: We need uncertainty and chaos to thrive, strengthen and improve.
- Skin in the Game: Align your interests and win and lose at life together.
If you have an actionable tip for us, please share it in the comments. If you liked this post you can subscribe here.
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