Condoms and Other Risk Mitigation Strategies
Cocaine, STDs, and how to use risk asymmetries to your advantage
Charlie Munger understands risk asymmetries. That's why he's famous for saying, “Don't do cocaine. Don't race trains to the track. And avoid all AIDS situations.”
He's also explained that the success of Berkshire Hathaway is not due to brilliance, but rather simply avoiding stupidity.
Risk asymmetries—where the potential upside and the potential downside are mismatched—are math problems at their core. And since it's often difficult to visualize just how lopsided the risk-to reward-ratio is, we end up taking stupid risks.
For instance, wearing a seatbelt has a downside: it's uncomfortable. But once you weigh that risk against the massive potential downside of not wearing one, the decision to wear a seatbelt should be obvious.
These tradeoffs seem elementary, but the number of people who ignore asymmetric risks is alarmingly high.
Unprotected casual sex introduces a risk with potentially catastrophic consequences. Is it really worth skipping a condom for an extra 15% of pleasure? I think not.
Contrary to his popular image, Charlie Munger actually has a quite nuanced view of risk. Rather than being universally risk-averse, he explains that he took on much higher levels of financial risk until he achieved financial independence.
Similarly, Jeff Bezos took on short-term risk by moving to Seattle to start Amazon, but it was his way of avoiding a more severe potential downside: looking back on his life and regretting not starting Amazon.
Munger explains that a risk strategy should be adapted to one's own talents and temperament. If a given risk keeps you from sleeping at night, it's likely not the risk for you.
I am very comfortable with risk, and I have not yet reached a point in my life where "losing it all" or "going back to square one" scares me. I want to avoid dying with regrets. And I definitely don't want to kill an innocent motorist. So I'll take massive business and career risks, and I'll call an Uber instead of driving under the influence.