How risky is to drive your car?
Of most of the things you do. Many seem harmless. On a daily basis, you drive, cross the street, go biking and so on. Although, each of those activities is not dangerous. In fact, it carries a low probability of having an accident. The question is how habitually you do that thing. For instance, even though there might be one chance over a thousand of getting injured when you drive. If you drive every day for the rest of your life, chances are sooner or later you’ll be involved in an accident. And the level of success you’ll have in surviving it will depend upon how cautious you’ve been. Imagine you ended up in a car crash at twenty miles per hour. Probably at the end of it (assuming the other car went at the same speed) then you’ll survive. Now imagine the same exact accident at forty miles per hour. Your chances of survival will be much less. And they will diminish exponentially the more you’ll press your foot on the pedal of your car.
Therefore, the only way to survive to life’s seemingly less risky activities but that you do on a daily basis is the so-called constructive paranoia. Jared Diamond defined it in the book The World Until Yesterday. He is also author of The Third Chimpanzee (1991), Guns, Germs, and Steel (1997), Collapse (2005)
When I learned about it, it made me realize how important this concept also is for business. Imagine you invested an amount of money in a financial instrument that carries a dismal risk of default. Imagine you have been relying on that financial instrument during your life. Take, a pension fund for instance. You save a bit each month and accumulate a reasonable amount of money. That pension fund’s probability of default is extremely low. Although, you keep investing in it the whole life. The longer you’ll invest in it the higher the risk of its default might increase. What should you do? Cover yourself from the risk of losing it all. How? For instance, by placing a stop loss!
We do many things on a daily basis. Many of them seem riskless. And in fact, they are. Yet if we do them repeatedly then we want to put more conscious effort to make sure to be ready when the worst case scenario materializes!