Housel (2020, p. 142) complements his own advice with that offered by Nassim Taleb, a best-selling author on risk and decision-making:
“Nassim Taleb says, ‘You can be risk loving and yet completely averse to ruin.’ And indeed, you should.
The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. The odds are in your favor when playing Russian roulette. But the downside is not worth the potential upside. There is no margin of safety that can compensate for the risk.”
Much as in the case of Kahneman’s physicians managing risk when making life-and-death decisions, Housel’s Russian roulette players are facing unacceptable risks—and these risks rarely come with regret.
Risk and Anticipation
Morgan Housel has more to say about risk and focuses in particular on the role that planning and anticipation play in the effective management of risk. As Housel (2020,p. 63) proclaims in the title to one subsection about the psychology of money: “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”
He (Housel, 2020, p. 63) expands on this provocative statement:
“What’s the saying? You plan, God laughs. Financial and investment planning are critical, because they let you know whether your current actions are within the realm of reasonable. But few plans of any kind survive their first encounter with the real world. If you’re projecting your income, savings rate, and market returns over the next 20 years, think about all the big stuff that’s happened in the last 20 years that no one could have foreseen: September 11th, a housing boom and bust that caused nearly 10 million Americans to lose their homes, a financial crisis that caused almost nine million to lose their jobs, a recordbreaking stock-market rally that ensued, and a coronavirus that shakes the world as I write this.
A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality.
A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error.”
