Risk

Risk. How best to understand & take on appropriate amounts?

The first thing to do is to discriminate between risk tolerance and risk capacity. Many people who take on risk do so because they can tolerate risk, e.g. they either enjoy it or at least can stomach it, and as they do not realize that they do not have the capacity to sustain losses. Compulsive gamblers are like this - if you are a billionaire you can have a large poker allowance and not endanger or risk anything really. You have capacity. If you are holding down a normal 9-5 job, and are barely making your bills, and you have a family to support, well, you do not have the capacity. You may have a high tolerance for risk, but you cannot afford this. Do not delude yourself that you will win and buy your family a good life. Do not mistake a need to win with an ability to win.

What you want to do is overcome fear and increase your tolerance for risk if you cannot confront it, or if you have a high tolerance you will actually want to reduce this and realize that feeding the feeling of risk may not be worth the entry cost. Either way, you must calibrate in a way that accounts for your (perhaps small) capacity. The key to managing risk is capacity.

One thing we should realize is we often have more capacity than we assume - we live in the richest time in history, so "risking" things to take on a career path you love but may not pay much is not much of a real risk - as long as you are prudent and can accept the relative "poverty". You may be relatively poor to others, but on an absolute level you will most likely be fine in terms of finances.

Another thing we must learn is that there are two ways we can risk, let us say that we feel we can stomach a 80% chance that things will turn out well. We can either do this:

(A) Bet everything on something that we judge to have 80% odds.

Or we can do this:

(B) Bet 80% of our stuff (money, time, etc) on something we judge to have 100% odds, and 20% of our stuff on super long shots.

There are a couple of advantages to (B). First of all, it is more secure. No matter what we have 80% of our wealth protected. Betting everything on a 80% chance is foolish, as you have bet away your capacity so you are screwed if you lose; option B takes capacity into account and makes sure we keep the capacity. Secondly, the long odds pay much more if they work out - and can really engage us either way, win or lose, by having us really live risk and put ourselves to the line or try things that are difficult yet rewarding. It is doubtful you will become a great author and write a book that will change lives. But you can spend a chunk of your day working on your book, and without risking your livelihood you will become a better writer and have a shot at making the tome that changes the world. Perhaps 20% of your time is worth this to you.

By accurately judging your capacity for risk you can proportion how much you want to risk on long shots - if I'm a billionaire I can risk millions and millions of my finances, and all of my time, on super long shots. If I'm working myself out of debt or struggling to feed my kids I can risk little finances, and need to keep my job, but can spend some of my time on long shots. Maybe all you have is 10 or 5% of your time you can do this in, after all you want to play with your kids, put food on the table, etc. But I can likely demarcate 5% of my time to writing that script - at the very least you are engaging life, growing, and showing your kid a great lesson (hard work, growth, risk, the idea of capacity, engaging life, struggle, blah blah blah). Yes, it will be hard to scrape up the time, to sit down and do the work. Or to scrape up the courage of doing your all and (most likely) not measuring up the first few (many, every?) times and failing. But it is likely worth it - you will gain in proportion to the difficulty. And maybe you will sell your script and make a difference in the world and get some coin also, or at least have a story worth telling about how your script was turned down in {insert cruel manner here}, or have the ability to tell more compelling and interesting stories to your friends.

Finally, there is risk and there is uncertainty. I used the term risk, but risk is boring and using the term here is somewhat misleading. Risk is known - if I flip a regular coin I have about 50% chance of getting heads. Uncertainty is what is really rewarding. If I have two doors, "write a book" and "do a normal job" I don't know what is behind them - but I can guess that I am most likely going to do OK doing a normal job and will have food on the table, at the cost of an exciting life perhaps. For many of us, e.g. those without rich parents, we do not really have the capacity to have any other realistic choice. It is dangerous and stupid to operate otherwise - especially if others rely on you. Uncertainty is the super long odds - we can't accurately measure the risk, we simply know the odds are against us - way against us. But taking the uncertain path is when we engage life, grow as people, and can really find and create wealth. Many people like the feeling of risk - they gamble a lot, even though the odds are slightly against them (and therefor they will eventually get fleeced of their money); or perhaps they just want to live an engaged and fulfilling life. For some they go in knowing they are paying for the feeling, for others they think they actually will win. But the important thing to know is this - you can usually go through both doors, you can hold down a normal & secure (and perhaps somewhat unengaged) job, and you can spend some time going through the second door of "write that damn book". It is not either/or like in option A - oh, my parents are rich so I can risk a life that has 50% odds, or oh my family is poor so I must take a 90% career. You can pick a very stable job and take super long shots that allow you to grow, find adventure, and live a real life.

Uncertainty is where life is at. Many of us do not have the capacity to afford exploring uncertainty with all of our time, but almost everyone has the capacity to spend some time exploring life. Figure out how much capacity you have, and start spending what you can on living and exploring.

Finally, whatever you do, do not resent your family for "tying you down". You chose your family with your actions, and you choose your life every day. Blaming them for what you do is a feeble excuse, and one that will limit both your and your families joy. Many people seem to fall into this trap, and waste their lives in an unhappy state with an unfulfilling job. You do not have the binary choice of "fun and fulfilling life" versus "terrible and grueling life", if you are anything like most people you have a small capacity so you must toil but you can also live and explore uncertainty with what capacity you do have. Putting blame on your wife or kids will just undercut your joy and undercut your life, you are simply using your family as an excuse for not confronting life - an easy, yet awful, out. As far as excuses go it is pretty poor - you gain nothing but negative feelings and wasted life from it - and yet it seems surprisingly common. Your family is a gift, don't sabotage yourself and resent one of the most important things you can obtain in life.

Poverty - a social view

What is poverty? In western societies we often define poverty as lack of financial resources - if you make < $X a year you are, defacto, poor.

Is this an accurate definition? On the face of things, yes, but dig deeper and things look a bit differently. Consider some poor person who wins the lotto. We all expect them to go back to being poor fairly soon. Or look at many NFL players, they go broke shortly after retiring, despite having an almost sick amount of money. Poverty obviously relates to skills, an ability to manage ones life.

Consider this definition: poverty is a lack of healthy social networks. "The Rich" help each other, give each other advice, train their children. Some ethnic groups help each other, give each other advice, train their children. The groups we see as rich, the ones that persist, that consistently create wealth and value, that are happy and have plenty are ones that are rich in connections, bonds, duty. They have healthy social networks.

Now look to the poor - they do not help each other, they espouse victimhood, they are critical of "The Rich" (including, say, Jews who are one of the ethnic groups with meaningful social networks), they do not give meaningful advice to each other, they do not work hard to create value but instead consume value. If one is from this "group" (defined mainly as a lack of group cohesion) and hones ones skills and creates value and wealth, well, one is in trouble: without finding a cohesive group to join the value and wealth created may soon disappear.

The poor are those who are poor in relationships. A given poor person has parents, friends, siblings, and spouses who have overall negative and unconnected personalities. Whining, victimology, passivity, complaint, justification, selfishness: we reconize this in "the poor". The social environment the poor live in is sparse, unhealthy, negative. How could anyone thrive in such a corrosive environment?

Under this view we can see how better to become rich - not only must we hone particular skills that allow us to create wealth, but we must hone social networks that are positive and productive. We must become gardeners of our social environment - watering, fertilializing, finding "plants" that work together, creating beauty. We must also do something that is difficult: pulling weeds. This can be painful, but if we wish a bountiful garden we must till, pull weeds, and protect against invasion. If you are starting to change your life, you may find that you have to cut ties with your parents and some former friends. Invite them with you, but do not tie yourself to them. Our relationships are a choice, and a most important one.

Learning how to make money at some task is not sufficient (though it is necessary) to become wealthy; learning how to be a valuable friend, someone people want to know and be with, and finding others to join with in the struggle of life is needed. And here lies true wealth - the financial aspect is but one part.

University students may eat noodles, live in run down and sparsly furnished apartments, make very little money (and actually usually have significant negative money (debt)), and have a lack of financial resources - but they are not poor. They are forming deep connections with others, they are learning skills to create wealth, they are engaging ideas and life and people, and they most often come from caring families. Our great grandparents were not poor either (at least not all of them), despite lacking almost everything we take as granted in terms of material wealth.

Poverty is not measured by how much money you make per year. Poverty is measured by a lack of meaningful social networks . A social pauper necessarily finds he is a financial pauper, if not now, then soon. If you want to be "rich" forget the money, and consider people: how to connect, how to bring value to others? Even if you do not find the finances you want, you will find what we wish to buy with the finances - a happier and more meaningful life.

First things first - people. Find others who care about life, themselves, and others. Create value with them. Actually live. That is wealth.