Luck and Risk Surface Area

Dec 2021

 

 

“There are rules to luck, not everything is chance for the wise; luck can be helped by skill.”

― Baltasar Gracián

“The biggest risk is not taking any risk… In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

― Mark Zuckerberg

 

I’ve always believed that there were more opportunities than a person could find in their lifetime. That life is really about just trying to find and make the most of good ones when they come your way. But the problem is good opportunities are spread out and hard to find. Plus you’re never sure exactly when you’re going to come across a good opportunity.

The probability by which you come into contact with good opportunities is what I think people mean when they talk about luck. When you come into contact with good opportunities with high frequency, this is good luck. But the thing about luck is that you can optimise for it. You can increase your exposure to it.

If a person just does more things, they increase their luck surface area. People can expose themselves to more good things in life simply by doing more things. Going to more events, meeting more people, starting more projects etc. If you go on lots of dates for example, you’re much more likely to meet your life partner. If you watch a lot of movies, you’re more likely to discover movies you like. If you make lots of investments, one is more likely to be successful etc.

The act of doing more exposes you to more variance and the probability surface area increases and better things will happen to you. You’ll also find more bad opportunities that you dislike this way too, but you have agency over that. You never need to choose a bad opportunity. And if you can’t tell the difference between something good or bad, then that’s a different kind of problem. That’s not an exposure problem, it’s a selection problem. Learning to distinguish good from bad.

This is why you should generally avoid saying no to things. Because the more things you do in life, the more you expose yourself to opportunities; the more good opportunities you’ll find and the luckier you will get. Which pays dividends across business, money, love, happiness and so on. You get a finite amount of time in life, on average of about 80 years; and then within that time you try to make the most of it and do as much as you can.

When you have a high surface area of luck, you also improve your odds of finding a black swan. Like someone starting a Unicorn company and asking you to join it. Or finding the love of your life at your University college. Or something rare but incredibly beneficial. Because it increases your odds of being at the right place at the right time. Having a high luck surface area is how you can experience low probability events with high frequency.

Therefore making small behavioural changes that might increase your luck surface area is in a sense, manufacturing luck. Traits like being optimistic and open to trying new things. Being supportive and generous with your time and capital. Being curious, nice and a kind person. Having a wide variety of interests and investing in them. These are qualities that widen the funnel of experiences and brings you into contact more frequently with experiences that produce a disproportionately positive affect on your life.

But this works in the opposite direction too. Increasing your surface area of luck can also increase your surface area of risk. Because the same force that brings you into contact with positive things can also bring you into contact with negative things. This also exposes you more to negative black swan events. If you catch a lot of flights, you’re more likely to be in a plane crash, even though the individual probability of being in a plane crash is still very low. If you invest in lots of businesses, more of them are likely to fail and you lose your money and so on.

This obviously doesn’t mean you should become a hermit living in fear who never goes outside. But I do think that basic behaviour changes that lower a persons risk surface area are a good thing. One big one is to avoid things that can be addictive, even though the odds of becoming addicted is low, if you become addicted to something like cigarettes or drugs or gambling, then it’ll have a disproportionately negative affect on your life.

I think this is why it’s important to be non-violent or a pacifist and to not get into unnecessary fights in life. Because there’s no telling when a random exchange of words with someone might turn into something really dangerous. This happened to a really good friend of mine from school. His name was Josh.

One day he was outside a Mcdonald’s and as he was walking home, 2 guys directed a racial slur at him. He said some words back. Things got heated and then they attacked him. But people are actually very fragile and a stray kick hit Josh in the head and then he died. A random exchange of words turned into a murder, which my friend was on the receiving end of; and I never saw him again. Even the guys that did it said it was accident, they didn’t mean to hurt him as much as they did when they were kicking him. Thankfully there was some justice and the offenders got 20 years in prison. But Josh experienced a random negative black swan event that resulted in him losing his life.

That moment has really affected my perspective on risk. That under no circumstances is violence ever worth it. Even if it means I accept prejudice or bigotry directed at me, to let it brush off and not affect me. Because I might end up dying because of something senseless and random. That risk minimisation goes hand in hand with luck maximisation. To try to increase your luck surface area as much as possible while also decreasing your risk surface area as much as possible.

This is why people wear seatbelts. Even though it’s rare to be in a car crash, it’s a small thing you can do that will dramatically increase your survival rate if you ever do end up in one. This is reducing your risk surface area. Cultivating low effort behaviours and traits that have a high impact on reducing the amount of risk you experience in life.

Some axiom within this is to do with the reward and loss profile. When I was younger I took on risk much more frequently because I had less to lose. I loved skydiving and startup investing. Now that I’m older and married and have businesses, cats and dogs; real responsibilities, I have much more to lose and so I try to take on much less risk. I naturally became much more risk averse with age.

I think this is also why as people get older they naturally start to say no to more things. Because they don’t need to get as lucky anymore because they’ve already achieved some forms of success. Whereas when you’re younger to become successful you need quite a lot of luck behind you in the first place.

In fact I think after a person has achieved some success in life. From that point onwards it’s their game to lose. Once you’ve achieved many of your dreams then only through stupidity or carelessness or by making bad decisions can you lose from a winning position in life. In practice what that means is exposing yourself to too much risk.

This is why in investments it’s recommended to diversify. It spreads your risk across multiple assets. If all you owned was a house in the 2008 housing crash or all you owned was technology stocks in the 2001 dot com crash, you got hit very hard. But if you owned multiple types of assets, you did ok.

I remember reading an article many years ago by James Altucher about how he lost $10 million dollars and thinking, if you had that amount of money, why would you ever risk it? That’s a life altering amount of money. It didn’t occur to me until much later in life that it may not have been because of a bad decision, but that he may have just had a high risk tolerance and experienced a negative black swan event.

Generally a person experiences incremental luck or risk but within the umbrella of that is the black swan occurrences which are discrete luck or risk. There’s a big difference between incremental risk versus discrete risk, the same way there’s a big difference between incremental luck and discrete luck. One is if you work on a company every day, it may end up successful versus the other is if you buy a lottery ticket you might win. Or for risk, eating vegetables every day to avoid developing a disease versus getting hit by a truck.

Personally, I think discrete probability has a greater effect because it’s so unexpected. Deep down a person that smokes every day knows they’re building up toxins and it’s harmful. But you never expect to be the one person who gets hit by lightning when you’re playing gold. And so cultivating low effort, high impact behaviour creates a cantilever of outliers. For me, that means letting a lot go that I otherwise wouldn’t have, my version of avoiding playing golf in a storm.

there are two probability dials you want to try to tune and optimise for. You want to increase your luck surface area to increase the chance good things will happen. While also decreasing your risk surface area to decrease the chance bad things will happen. If black swan events happen, you really want them to be good instead of bad.