Analyzing Risk

On a recent podcast I was on, I was asked why I took so many risks. I stuttered for a second before answering the question because I was trying to think of an example of a big risk I took. I couldn’t think of any, so I had to answer the question in a different way.

At the same time, I understand why people have the perception that I take a lot of risks. I think the difference is in how we perceive risks, and I’d argue that my method of doing so is more accurate.

When I calculate risk, I look at the statistics and before blindly applying them, I ask how relevant they are to me as an individual.

In some cases, they’re fairly universal. My risk of dying in an airplane crash is the same, per mile, as anyone else’s. The financial risk I accept by investing in a particular stock is the same as well.

But some statistics can be very accurate for a population yet way off for an individual. When I began riding a motorcycle I looked carefully at what actually caused motorcycle accidents. Alcohol was a factor in 50% of crashes, and since I don’t drink I can eliminate that. I eat a healthier-than-average diet, so my risk of many diseases is decreased. I’m on my computer all the time so my risk for carpal tunnel is much higher than for most.

There are also cases where a good outcome and a bad outcome are different for different people. In many cases missing a flight would be okay for me because I could stay longer somewhere and have enough experience that I could probably get the airline to give me another flight for free. And if they don’t, I have enough miles that I can bail myself out. But for an executive on his way to an important meeting, missing a flight could be disastrous.

You have to consider your individual chances of different outcomes, and then assess how good or bad those outcomes are.

When I decided to drop out of school, my outcomes were very different than most. Getting a normal job was a worst-case scenario for me. I remember thinking I’d rather just be homeless in Hawaii than have a cube job. Some people really love their normal jobs, so we would be opposites there. I like figuring out my own way to earn money and having a lot of autonomy, so having to hustle and figure out how to earn an income for myself was a major plus.

I also learn really well on my own or with a one-on-one coach, and poorly in a lecture situation. I enjoy learning and always seek it out on my own, but school was taking up a lot of the time I would have spent on learning. Other people learn best in classes and take advantage of professors’ office hours and study groups. Neither way is better, they’re just different.

So for me school was causing me to learn less and was costing me money while bringing me towards a normal job. I felt like staying in school was risky because it was having an immediate negative effect on me and was moving me towards a path that I considered to be a worst-case scenario.

On the other hand, I felt confident I could start a business on my own and really looked forward to doing so. So to me there was no risk in dropping out of school, other than having to disappoint people who worked hard so that I could be there.

Another interesting example is money. A while after I got to the point of “unlimited runway”, I had bought just about everything I wanted that was within reach of that order of magnitude of income. I had a good laptop, a good watch, a good motorcycle, a good car, a good house, some good art, and a few good articles of clothing. The income left over allowed me to buy flights and inexpensive healthy food.

The things I could buy in the “next level up” aren’t interesting to me. I don’t want to eat fancy food, go to expensive nightclubs, fly first class, go on expensive vacations, buy designer clothes, or live in a fancier house. I would enjoy many of these things, I’m sure, but none of them matter to me enough to spend money on them.

However, levels above that are very interesting to me. I’d love to buy really good art, buy an airplane, fly groups of friends and family members around, start a foundation, and hire a private chef.

For that reason, it’s actually riskier for me to try to earn small consistent returns than it is for me to try to go big. So I invest my money in more speculative things like cryptocurrencies and a hedge fund. The same is true of how I spend my time. I limit the number of coaching clients I take on so that I can have a lot of time to work on things like CruiseSheet which could someday be sold for a lot of money. Getting a job would be extremely risky as it would guarantee me an income that wouldn’t make my life functionally better, but would decrease my chances of creating a valuable company.

Dating is another example. It feels risky to make yourself vulnerable and commit in a relationship, but if you want to find a long-term partner, it’s much riskier to hedge your bets, as you’re unlikely to find yourself in a relationship that’s strong enough to last.

By the way, all of these examples are presented without judgment. School is unequivocally less risky for many, probably most, people. So is investing money conservatively. If you are deeply affected by rejection and don’t want a long term relationship, you’re better off keeping your cards close to your vest. I chose these examples because the first two put me opposite most, and the last because it’s more universal.

One of the main points I hammer through this blog is the importance of making your own thoughtful decisions. I think one of the best parts of this world is our individuality, because I believe that when we’re all off doing our own things, that creates a lot of good for everyone. Making your own decisions is the process of using data to guide your choices, but it’s also the process of examining the data to make sure it applies to you.

What outcomes are good for you? Which are bad? Are there individual factors about you that make certain outcomes more or less likely? One of few things that’s universally risky is not taking the time to direct your own life, as that’s a path towards regret and missing one’s potential.

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Photo is Mount Fuji from a plane I was on today. Cool surprise to see it out the window as I wrote this post.

By the way, I was on three different podcasts recently. Noah Kagan, Simple Programmer, and OwnStream. Enjoy…

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