Cover the Average Case, Look Out for the Extreme Case

Experts have estimated that the odds of dying in a plane crash are one in 11 million.

“If you take one flight a day, you would on average need to fly every day for 55,000 years before being involved in a fatal crash,” MIT statistician Arnold Barnett once said.

In 2014 though, Malaysia Airlines had two freak accidents involving Boeing 777s where every passenger died. Not only did MH370 disappear on the night of 8th March, roughly four months later, MH17 was shot down over Ukrainian skies.

If you’d asked a statistician to estimate the odds of these events happening in February 2014, they’d have said: “virtually impossible.” Ask a statistician today, and they’ll say the same thing.

Ask anyone who’s worked with a risk matrix before, and they’ll tell you there’s a difference between severity and likelihood. A plane crash is severe, but the likelihood is remote, so overall it’s still miniscule risk.

Of course, probabilities mean nothing to the families of the passengers who died. Watching Netflix’s recent documentary on MH370 reminded me of how much pain the loved ones endured. It doesn’t matter if the odds of a fatal plane crash are 0.00001% . When it affects you, it’s still 100% tragedy.

It also reminded me of my fear of flying. Over the years, every time I’ve gotten on a flight, I’ve asked myself: “Will I make it today?”

Morgan Housel writes:

“Most people could not get out of bed in the morning if they were honest about how much of their future is unknown, hangs by a thread, or can be pushed in another direction by the slightest breeze.”

These are difficult thoughts to manage. On one hand, things far beyond your control can wipe you out. On the other, you know most of the time it’s not gonna happen to you. How to live keeping both things in mind?

Here’s a few practical things I’ve learned about dealing with risk:

Protect Against “Average Case” Risks

Protect yourself against average risks that happen to the average person.

The simplest example is wearing your seat belt.

Another is buying insurance. Risks that common insurance policies cover — like critical diseases — are both common and severe enough to be significant. You probably don’t know anyone who’s been involved in a plane crash, but you probably know at least one person who has cancer.

Another one: your parents forcing you to go to university.

Sure, hypothetically you could gain an education from watching YouTube videos. But hard statistics show that the average university graduate earns much more than the average high-school graduate.

Again, we’re talking about “average case” here. Of course, there’re outliers of dropouts becoming billionaires, just like there’re cases of PHDs ending up jobless.

But for most people, a university degree gives you a good foundation to build wealth from. Your parents were really trying to protect you from the risk of being unemployed.

Build Redundancy, but Accept You’ll Never Be Able To Cover Every Scenario

Most modern commercial planes have two engines. If anything happens to one engine, planes can continue flying with the other. Even if both engines fail, planes are still able to glide — giving pilots a chance to make an emergency landing.

“But why not three engines?”

Well, the same line of questioning can easily lead to: “There’s a remote chance even three engines can fail. Why not four?” Just for more and more layers of redundancy. Yes, you could build the safest plane in history, but then nobody would buy it because it’s too expensive to fly.

Our natural instinct is to demand elimination of risk. 100% safe. In reality, there’s no way to eliminate every risk. Only risk management.

In other words, insurance is good. But you probably don’t need five insurance policies.

Emergency savings that you can immediately grab are good. But you probably don’t need five years of cash stuffed under your mattress.

The nature of risk also means it’s impossible to plan for every risk in advance. As columnist-artist Carl Richards said, “Risk is what’s left over after you’ve thought of everything.”

Uncomfortable but true.

Another way of seeing it: The world doesn’t run on perfection. The world runs on “good enough.”

Default Towards Optimism, Although Pessimism Feels Safer

While it’s important to prepare for risks — keeping in mind risks you’re not even aware of — my big fear is this leads to pessimism.

Very easy to give up:

“Why bother? Everything’s going to shit. Even banks are crumbling. The economy’s next.”

Being optimistic doesn’t mean you’re blind to risks. Realistic optimism means having faith you’ll be able to figure things out — no matter what happens.

As Kevin Kelly explains in his classic essay “The Case for Optimism”:

“We should be optimistic not because our problems are smaller than we thought, but because our capacity to solve them is larger than we thought.”

Don’t be the COVID-19 fearer who still doesn’t dare to go out in 2023. You can’t live your life based on fear of low-probability events.

GitHub’s former CEO Nat Friedman has a punchier quote:

“Pessimists sound smart. Optimists make money.”

Catch the Upside of Asymmetric Opportunities

We’ve spoken a lot about risks of bad stuff happening. But there’s a flip side: low-probability, high severity events also happen for good things.

In his classic tweet on asymmetric opportunities, Naval Ravikant wrote about things with huge upside but limited downside:

What are the odds that your startup, book, or first date will end up wildly successful? Probably not. But it won’t cost you too much to try.

Just like how a bad low-probability event can be catastrophic, a good low-probability event can change your life forever.

Shoot your shot.

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Pic from Pexels: Nur Andi Ravsanjani Gusma

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