Don’t bet your all, even on world’s best Opportunities

#MakingBetterDecisions, #ConsciousApproach,?#focusonwhatmatters, #Wealth, #Careers

“In cricket, a batter should not look to hit a boundary off of every ball. Afterall, a batter cannot get any more runs once s/he is out.”

Welcome to this week’s blog where I write on a category of inadvertent decisions that corner us into fragile situations. I end with simple but commonly overlooked ways of addressing this.

The speed at which the world turned around from the despairing lows of Corona pandemic is quite remarkable. Now, COVID-19 episode feels like a distant memory. It is certainly a great example of human resilience.

Notwithstanding 2022’s precipitous falls in stock markets, rise in inflation and war in Ukraine, we have gotten better on major indices compared with 2019. Many people are materially better off already.

All this is good but here is the rub. I’m not sure if such optimism and progress will be shared by all – for example, those who lost family members to Corona pandemic. While overall, things may have gotten better, a number of people suffered irreversible and permanent setbacks.

During times of economic slowdown, in order to dress up financial results or to correct the preceding excesses (largesse), employers lay off large swathes of employees leaving many employees in quite a bit of fix. This is happening right now in big tech industry.

While unemployment of the larger economy may be at historic lows – a cause for great optimism, someone who just got laid off may have completely opposite sentiment about future.

Is there a practical implication here? Yes, one better be very conscious about getting swayed by wide-ranged optimism or pessimism while committing themselves to any irreversible decisions. For example, no matter how positive or optimistic you may feel about a prospective offer of employment, do account for things not working out. In the minimum, burn no bridges. No matter how well stock market is performing, do not allocate all of your assets to stock market. No matter how big the prize money, do not ever play Russian Roulette.

In other words, avoid situations that could result in the possibility of game-over for you no matter how improbable. How much of your wherewithal do you put on stake, should be a critical input in your decision.

This is easier said than done. How to identify situations where we are more prone to be swayed by standard payoffs while ignoring embedded distinct possibilities of “game over”.

Take investments in stocks. NIFTY (a benchmark Indian stock market index of 50 of the largest Indian companies) has returned about 15% compounded year on year for the last twenty years. So, it is natural to assume that investors would have gained this handsome return too. But generally, not so. In these twenty years, there has been an occasion when NIFTY fell about 60% (during the global financial crisis for 2008-09) and another instance when it fell by 30% (start of Corona Pandemic in 2020). How many investors would have had the gumption and conviction to remain invested through these gut wrenching falls to reap the eventual fruits of their investment. Even more importantly, would you have persevered through such painful and unnerving episodes? Most people don’t.

Many years ago, when I ran my first half marathon event, a runner collapsed as soon as he crossed the finish line. He was later declared dead due to heart attack. I gathered later that he was a senior leader in a large Indian multinational organization and he was trying to attain his personal best performance in that event. Not to be an alarmist here because dying of heart attack or for any other reason in a running event is very, very rare and many runners do regularly achieve their personal best performances in running events. My point here is that one needs to take into account one’s personal circumstances in addition to general characteristics.

I personally know of three cases of successful leaders in progressive organizations who suffered heart attacks in the ages of 45-50. They had to scale down their career aspirations after that health episode. I am sure there were other contributing factors too but stress and strain from ambitious career journeys were definitely significant causes. More commonly, I come across corporate leaders suffering from chronic lifestyle diseases (cardiovascular and diabetes) most likely caused by uncalibrated career aspirations.

On the flip side, I know of a bunch of runners and corporate leaders who smartly calibrated progress in their crafts and consequently scaled great heights. Perhaps an extreme example of this would be the storied success of Warren Buffet and Charlie Munger. The following statement of fact from Morgan Housel’s Psychology of Money never fails to boggle my mind “$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday”. Buffet and Munger were never in a hurry to get wealthy.

Accounting for worst case scenario is one way to address this. Incorporating layers of safety over the worst case scenario makes your situation robust. Diversification helps but it is a defensive strategy. Over-diversification is costly. Growth comes from concentration – not diversification. So, the key question is how you balance concentration with diversification. The goal is not to maximize gain but to optimize the gain-risk combination.

Be cautious about situations where the expected outcome may not easily translate into realized outcome. In Russian Roulette, assuming a six bullet chamber, expected outcome of winning is 83.3% of the prize money, if a large number of people were to take up that challenge. But if one person were to iterate the game for even up to six times, it would be game over for that person. Such situations where the ensemble (or population) average is not equal to temporal (over time) average of an individual are considered non-ergodic. Non-ergodic situations are not elastic as in, they do not allow one to revert to the previous state upon retracting the input which caused the change in the first place.

“Things that have worked for a long time are preferable - they are more likely to have reached their ergodic states. At the worst, we don't know how long they'll last.” ―?Nassim Nicholas Taleb

Bottomline

Never commit to a game all you have, if playing it exposes you to a chance of total ruin. So, any decision that could result in irredeemable loss, no matter how unlikely, should not be engaged with all your wherewithal.

For further reading

1.??????Read (or listen to) works of Ole Peters on Ergodicity

2.??????Ergodicity by Luca Dellanna

3.??????Related topics: Kelly Criteria, Sequence of returns

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Thanks for taking time to read this. In this newsletter, I share my learnings that could help you improve your decisions and make meaningful progress on your goals and desires. I share stuff that I have personally experienced or experimented with. If you find this newsletter worthwhile, please do share it with others – of course, only if you do not mind it.

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