Optimize for Survival

Although we often glorify risk taking as a general principle, optimal outcomes are the result of pushing the limits only within a threshold of which you can survive. To assume a position completely void of optionality is to paint yourself into a corner and given enough time will result in catastrophic loss or death.

You Can’t Know

Try as we might, humans have thus far failed to prove an ability to predict the future. Sure we can make decent guesses in certain domains and that ability has increased in the age of data science, but to date even our best predictive models are akin to child’s play when you take a hard look backwards in time. If you don’t believe me, write down your local weather forecast for the next ten days, record the actual weather each day, and compare the two afterwards. We’ve been trying to predict the weather for the entirety of recorded human history and we can’t even get that right a lot of the time. 

 As it turns out, the more rare the occurrence of an event, the worse we are at being able to predict it will happen. Interestingly it is these events which we are so terrible at predicting which often have the greatest impact (arguably because they were so unlikely we did nothing to prepare for them). For instance, a pedestrian getting hit by a bus is highly improbable and therefore difficult to predict, but when it happens the effects are life-altering. Similarly, predicting the occurrence of a global pandemic such as COVID-19 is all but impossible, however the unprecedented effect on economies, cultures, and families across the world will leave a scar felt for generations to come. 

 What I find most interesting about these high-impact, improbable events, is a discovery best articulated in The Black Swan: The Impact of the Highly Improbable (Nassim Taleb): it is far easier to measure the expected impact of these events than to measure the likelihood that they will occur. We might not know if or a when a global pandemic will strike, but most of us probably could have made some pretty good guesses as to what the consequences of extended shelter-in-place orders would be on global supply chains, brick-and-mortar businesses, the video conferencing software company Zoom’s valuation, or our spring vacation plans. 

 As economist John Maynard Keynes eloquently summarized the problem from a financial risk perspective, “Markets can remain irrational longer than you can remain solvent.” So what do you do to minimize your chances of getting knocked out of the game for good by the next Black Swan event?

Plan for the Worst

Because it is impossible to know what the future holds, it is ideal to make decisions which position you for survival in the worst case scenarios. Hence the “calculation” in the concept of calculated risk. Taking risks is fundamental to how we grow, how businesses innovate, and how human society moves forward. But placing bets which you cannot afford to lose is foolish and will always yield absolute failure faced with the test of time. 

 Practical examples of risks you can’t afford to take:

  • Borrowing money when your ability to repay the debt is fully dependent on events outside of your control without proper insurance in place (Fyre Fest)
  • Removing the lifeboats from a cruise ship to make room for an additional bar and retail shops in order to “maximize revenue”
  • Gambling $1,000 in Las Vegas when you only have $2,000 and your $1,600 rent is due next week before your next paycheck
  • Selling one of your kidneys to quit your job and travel the world for a year
  • Outsourcing the entirety of your business’s customer support function without a well-tested back up plan in place should your vendor go bankrupt overnight

Don’t be the next example of foolish risk. Analyze your life to understand where the exposure lies. Where are you most vulnerable? If the unthinkable happened - your partner died suddenly, your house burned down, you lost your job, or a natural disaster left you without power for weeks - would you be in a position where recovery was even possible? How would you rise from the ashes? What could you do today that would help you come on the other side even stronger than you started? Don’t stop at defining Plan B, think about Plans C, D, E, and on. Make decisions with a preference for that which stands the test of time. Or don’t. The world does need the occasional Fyre Fest to teach and entertain the rest of us...

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