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COVID-19 taught us the most valuable lesson in risk management.

The #1 Principle of risk management is to play with fire as much as you want… as long as you’re back on your desk the following day. 

Simple takeaways often work better than lengthy, nuanced statements when it comes to actionability. So, if you’re making any decision that involves risk (whether that’s at work, life, or personal finance), you’ll be better off asking yourself: Am I at even a 1% risk of total failure here?

I am avoiding destruction.

Calligraphy is neat, ending up in jail isn’t.

If the pandemic taught us anything, is that governments that immediately acted like the virus could be incredibly dangerous and arrive in no time fared significantly better than those downplaying the risk. This might seem obvious in hindsight, but, of course, governments at the time were acting on incomplete information, and in many ways still are. 

And so are we in our daily lives. 

We don’t know if the business we want to start will succeed, if trusting a website with valuable information is safe, or if we should hit ‘Send’ on that big-risk-big-payoff text message. And yet, we put our lives’ savings on a risky enterprise, assume things will be fine when taking a risk because they’ve always been, and enjoy indiscriminate drunk dialling. 

We think we are smarter than we actually are, and that is scientifically proven. 

The Dunning-Kruger Effect: A cautionary tale

Knowing a little bit could be more problematic than knowing nothing under the Dunning-Kruger Effect.

We all know, from experience, that stupid people tend to be the most confident in their own knowledge. 

In psychology, this is known as the Dunning-Kruger effect: A cognitive bias in which people with low ability at a task overestimate their ability. It originates on the illusory superiority of people that are unable to recognize their lack of skill.

Simply put, those that attain a little bit of knowledge tend to ignore that there’s more to the subject in hand than what they already understood, concluding that they’re already at the top (for more examples, find a local Med student). 

This makes the Dunning-Kruger Effect twice as scary since:

  1. It leads to overconfidence, bad decisions, and total failure. 
  2. It’s particularly tricky to know when you’re falling prey to your ego. 

Learn, experiment, question yourself (and most importantly, don’t go all-in.)

Notice that none of them went all-in.

In movies, we get a big payoff when our hero wins the grand prize/mafia’s favour/girl after going all-in, one on one, in a high-stakes poker game. The movie, however, doesn’t tell you that in every all-in situation there’s a 50% chance you might lose. 

In movies, we get a big payoff when our hero wins the grand prize/mafia’s favour/girl after going all-in, one on one, in a high-stakes poker game. The movie, however, doesn’t tell you that in every all-in situation there’s a 50% chance you might lose. 

In real life, the worst we can do is risk bankruptcy, jail, or public ostracising in a winner-takes-all scenario. We’re often biased to think these scenarios pay off better than they actually do, since we often don’t hear from the loser’s side. However, we can avoid falling prey of the Dunning-Kruger using the following tools:

  1. The why game: Asking ourselves why we believe our idea will work, and repeating the question ‘why?’ to ourselves, as many times as it takes us to arrive at an axiom or self-indulging statement. For example, if after a couple ‘why’s you arrive at ‘because that’s the way things are,’ you probably don’t know enough. 
  2. Consulting an expert: Ideally, consulting an expert that has skin in the game that you aim to play, and that has done what you aim to do. Don’t ask your well-intentioned-but-poor best friend what he thinks about building a multi-billion dollar empire. 
  3. Asymmetrical betting: Coming up with a hypothesis, and coming up with small ‘bets’ or actions to do to try and verify it. ‘Asymmetrical’ comes from the idea of low risk and a big payoff. Remember: always be there to fight another day. 
  4. Continued learning: It goes without saying that continued education (not necessarily through school) is the key to success.

We live in difficult times, and, while our governments and representatives make decisions (sometimes with overconfidence, others with lack of information), we’re left to assess our risks ourselves. However, if we follow the golden rule and avoid total failure, we’ll quickly understand that, when it comes to health, we cannot risk complete failure. One must always, at all times, take all available precautions.

We hope to see you on Thursday for our next post!

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