Shoot the Rationalist #6: Risk / Reward

in #blog4 years ago

This post is actually not going to be about markets for the most part although it is very applicable there. Although some may consider some of the advice and thoughts here common sense, I like to understand and articulate why some behaviors make sense in terms of the rewards and risks those behaviors incur and why other behaviors are not so intelligent. Life is not only about the upside. Sometimes we need to take into consideration the downside and understand the rationality and critical thinking was naturally selected for a reason.


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So, first I will cover the four quadrants of the two dimensional risk / rewards graph. There is low upside and low downside, low upside and high downside, high upside and high downside, and high upside and low downside. Smart behavior will often fall in the high upside and low downside quadrant while dumb behavior falls in the low upside and high downside one. We want to engage in the first quadrant and avoid the latter. The opposite two quadrants involve either conservative or extreme consequences and are often hard to judge whether a behavior is good or bad.

If we really wanted to spend a post getting overly mathematical about this, we could transpose points in this two dimensional space onto a diagonal one-dimensional line and use that model to make decisions. Of course you would need a way to measure decisions and I would rather not get too deep into tangents on how to quantify risk and rewards. These posts aren't supposed to be to long. I know nobody has the patience for long-term content.

In markets, market participants are focus primarily on upside. This often leads many investors to gamble and consequently lose their money when they try playing the market. Long term investing has significantly less upside and downside making it a more conservative play, but if we assume the market has a long term bias to the upside, that play is one that eventually wins. But that's enough of the markets, let's talk about the Coronavirus.

Wearing a mask is probably best quantified by the inverse: not wearing a mask. While there is upside to not wearing a mask is that you are slightly more comfortable and able to do slightly more, the downside is an increase the odds of catching or spreading a disease that is not well studied and probably has killed a statistically significant number of people. Just wearing a mask has little upside or downside in itself, but taking this conservative action reduces the odds of massive downside. Even though that downside is low probability without a mask, the upside is not worth the potential risk of getting severely ill. It's a gamble where the odds might be stacked in your favor, but you have plenty to lose and nothing to gain.

Going to a protest is another example of a low upside, high downside behavior. Again the risk of getting severely ill is weighted against the benefits of people hating you for going outside when they can't for a multitude of reasons and a government that won't listen or doesn't really care what you have to say. I'm not really seeing the upside there. That being said, I don't deny that you have a legitimate claim and right to be wherever the hell you want to be if the property is publicly owned (and open). I can't deny people their stupidity. But hey, if people want to high risk protest, if they get sick they may learn a valuable lesson about consequences. Hopefully, they don't get sick because given their behavior they might get others sick.

Things are apparently going to start opening up in a few days and behavior probably shouldn't change that much if we want to continue seeing downtrends in new cases. That doesn't it mean that people's behaviors won't. The risk / reward calculations favor the paranoid and overcautious. It is not like staying inside has been really that hard anyways. But I expect the worst (and often bet on the worst) and hope for the best. I'll probably only sneak out early in the morning (like I did prior to things closing down) and try to avoid people regardless of how open and safe people claim things are supposed to be. Until everyone takes this seriously or we uncover enough evidence that proves we have been overly cautious, I don't see how this doesn't blow up a second time. As rational as human beings are capable of being, we can't help but leap at the opportunity to jump for limited upside.

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