Understanding Risk in an Unpredictable World

Every event creates its own offspring, which impact the world in their own special ways. It makes prediction exceedingly hard. The absurdity of past connections should humble our confidence in predicting future ones. The other thing to keep in mind is to have a wider imagination.

No matter what the world looks like today, and what seems obvious today, everything can change tomorrow because of some tiny accident no one’s thinking about. Events, like money, compound. And the central feature of compounding is that it’s never intuitive how big something can grow from a small beginning.

There is rarely more or less economic uncertainty; just changes in how ignorant people are to potential risks. Asking what the biggest risks are is like asking what we expect to be surprised about. If we knew what the biggest risk, was we would do something about it, and doing something about it would make it less risky. What our imagination can’t fathom is the dangerous stuff, and it’s why risk can never be mastered.

Risk is dangerous when we think it requires a specific forecast before we start preparing for it. It’s better to have expectations that risk will arrive, though we don’t know when or where, than to rely exclusively on forecasts-almost all of which are either , nonsense or about things that are well-known. Expectations and forecasts are two different things, and in a world where risk is what we don’t see, the former is more valuable than the latter.

Two, realize that if we’re only preparing for the risks we can envision, we’ll be unprepared for the risks we can’t see every single time. So, in personal finance, the right amount of savings is when it feels like it’s a little too much. It should feel excessive; it should make we wince a little.

The same goes for how much debt we think we should handle-whatever we think it is, the reality is probably a little less. Our preparation shouldn’t make sense in a world where the biggest historical events all would have sounded absurd before they happened.

Today’s economy is good at generating three things: wealth, the ability to show off wealth, and great envy for other people’s wealth. It’s become so much easier in recent decades to look around and say, “I may have more than I used to. But relative to that person over there, I don’t feel like I’m doing that great.” Part of that envy is useful, because saying “I want what they have” is such a powerful motivator of progress. Yet the point stands: We might have higher incomes, more wealth, and bigger homes—-but it’s all so quickly smothered by inflated expectations. This isn’t to say the 1950s were better, or fairer, or even that we should strive to rebuild the old system—that’s a different topic. But nostalgia for the 1950s is one of the best examples of what happens when expectations grow faster than circumstances. In many ways it’s always been like that and always will be. Being driven by what other people have and we don’t is an unavoidable trait in most people.

One is the constant reminder that wealth and happiness is a two-part equation: what w heave and what we expect/need. When we realize that each part is equally important, we see that the overwhelming attention we pay to getting more and the negligible attention we put on managing expectations makes little sense, especially because the expectations side can be so much more in our control. The other is to understand how the expectation game is played. It’s a mental game, and it’s often crazy and agonizing, but it’s a game that everyone is forced to play, so we should be aware of the rules and strategies. It goes like this: We think we want progress, both for ourself and for the world. But most of the time that’s not actually what we want. We want to feel a gap between what w e expected and what actually happened. And the expectation side of that equation is not only important, but it’s often more in our control than managing our circumstances.

A common trait of human behavior is the burning desire for certainty despite living in an uncertain and probabilistic world. Dealing with the math behind risk and uncertainty in general is difficult-something people have struggled with forever and always will. That something can be likely and not happen, or unlikely and still happen, is one of the world’s most important tricks.

There are about eight billion people on this planet. So if an event has a one-in-a-million chance of occurring every day, it should happen to eight thousand people a day, or 2.9 million times a year, and maybe a quarter of a billion times during our lifetime. Even a one-in-a-billion event will become the fate of hundreds of thousands of people during our lifetime. And given the news media’s insatiable appetite for shocking headlines, the odds are nearly 1oo percent that we will hear about these events when they happen.

The decline of local news has all kinds of implications. One that doesn’t get much attention is that the wider the news becomes the more likely it is to be pessimistic.
Two things make that so:

Bad news gets more attention than good news because pessimism is seductive and feels more urgent than optimism.
The odds of a bad news story—a fraud, a corruption, a disaster-occurring in our local town at any given moment is low. When we expand our attention nationally, the odds increase. When they expand globally, the odds of something terrible happening in any given moment are 100 percent.

To exaggerate only a little: Local news reports on softball tournaments. Global news reports on plane crashes and genocides.

But we shouldn’t be surprised that the world feels historically broken in recent years and will continue that way going forward. It’s not—we just see more of the bad stuff that’s always happened than we ever saw before. The world breaks about once every ten years, on average always has, always will. Sometimes it feels like terrible luck, or that bad news has new momentum. More often it’s just raw math at work. A zillion different things can go wrong, so at least one of them is likely to be causing havoc at any given moment. And given how connected we are, we’re going to hear about it.

Source : Same as Ever: A Guide to What Never Changes by Morgan Housel

Goodreads : https://www.goodreads.com/book/show/125116554-same-as-ever

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