Harnessing The Power of Uncertainty

The latest piece of wisdom that I read today has been clamoring around in my head for hours. It filled me with such hope and inspiration that I need to share it. First, a little background: my parents are always trying to get me to invest my money in mutual funds. They tell me it is safe and I will enjoy seeing the returns, which are far beyond what any savings account can offer me. I reply that I am not interested in that sort of risk, where I would wager my savings for a modest return and the lingering possibility of implosion. They insist that nothing bad will happen, they even offered to guarantee it for me, but I am too modest to accept. I am simply not comfortable with "certainty."

My particular mindset got a little vindication today when I read the words of Nassim Nicholas Taleb while riding on the subway. Now, while I may be falling victim to a confirmation bias, I can't help but appreciate his wisdom as appealing to my eccentricity. He begins by explaining that there are two types of randomness: positive and negative. Negative randomness is where the upside is modest and steady, but the downside leaves you vulnerable. Consider the practice of lending, where the best you can expect is a return on your money with interest. The worst, of course, is the complete loss of your investment. The downside is devastating in comparison to the modest gains you can get in the best conditions.

Positive randomness is the opposite, where a small investment has the potential to pay off big. Naturally, these situations do not pay off nearly as often, but one success can easily offset many losses. Think about the nature of writing: one could spend a lifetime of obscurity, producing endless works with no recognition. All it takes is one hit to render all of that obscurity into immaterial. In the realm of acting, Eddie Cantor said, "It takes twenty years to become an overnight success." The investment equivalent of this is venture capital, where the downside is a tangible value (your invested capital), while the upside is nearly limitless.

Another way to approach this concept is in terms of visibility. If your upside can be forecasted or has upper limits, like a restaurant's income, then it is more likely that the downside is far more volatile. In other words, even if you consistently gain and succeed, a single error can wipe you out completely. Apply the question, "What have you got to lose?" In a restaurant's case, there is not a single bad day that can cripple it, but rather an outlying circumstance (like a spiteful employee tainting food, leading to a lawsuit, or a new, better restaurant opening a block away) that can do you in.

This lesson can also be applied to the practice of trend chasing. When a trend hits it big, there are many followers, but few ever manage to be as successful as the trend setter. Instead, a ceiling is set for the expectations of the followers. While riding a wave can make a large momentary profit, there is no staying power. Would it not be more lucrative to be in the business of starting trends? For this business, there are no ceilings, only potential.

In terms of happiness potential, I must say that frequent gainful affirmations are far more pleasing than frequent losing ones. It takes a special kind of masochist to appreciate the beatdown of loss after loss, always in search of that one win that will make it all better. There is no promise that that win will ever come, so why not settle for smaller, easier victories? It really depends on the type of person that you are. There are also strategies to offset your frequent losses in one area with frequent, predictable gains in another.

I will demonstrate how I do this in my own life. My writing is very important to me, I enjoy it immensely and I hope to one day be something that I can refer to as "a writer" when asked. For this to happen, I would like a little success, but I know that there are many writers just like me and luck has just as much to do with my chances as perseverance. I have to prepare myself for the grind. I will write and write and write, but without feedback or appreciation, it can get tiring. My offset is a different activity in my life where I get frequent positive feedback and I observe daily progress: climbing. When I climb, I can see my strength and skill develop. I see progress every time I go and it is absolutely satisfying.

Whether you apply this idea to investment, business, career choices or hobbies, it is a very solid set of ideas to consider. Understanding the risks of any venture you get into is the ultimate key to success. The risks I am referring to are not the statistical chances of success - these are immaterial and never work out. Rather, the risks are measures of what you're willing to lose and how much you're looking to gain. Is life a journey or an adventure?