Preppers are Risk Management Experts
As I’ve said before, prepping is a form of insurance. Preppers identify risk factors in their lives and systematically reduce those risks. This doesn’t mean we need to buy every insurance product someone wants to sell to us. Some risks are so small that we cannot possibly justify paying the insurance premiums. What we need to do, then, is learn which risks need to be mitigated. Risk management, the act of assessing and mitigating risks in our lives, is a skill every prepper should master. Below, I share three ways in which peppers can become better at risk management.
Identify the Downside
People hate losing. It doesn’t matter what it is: money, a competition, or your favorite t-shirt. Losing hurts, but not all losses are the same. If you sit down at a poker table with $20 in chips, you know the full extent of your potential loss. $20 is put at risk. The real world, though, isn’t like poker. Most risks don’t conform to a standardized set of rules and defined probabilities. Complexity clouds our ability to measure risk. In a world that is constantly changing, risk management becomes increasingly more difficult. That said, we can simplify risk assessment by focusing primarily on the downside.
If you place a bet on a coin flip, you have a 50% chance of winning. This bet is therefore symmetric. In life, we should be aware of asymmetry. Some decisions we make have the potential for a small potential gain, but could have devastating negative consequences. The downside risk is massive, whereas the upside potential is small. Let’s use Lasik as an example. Many prepping websites suggest preppers get Lasik surgery. If SHTF, you don’t want to be reliant on glasses, do you? Well, whether or not SHTF, you can be left in irreversible and intolerable pain for the rest of your life.
With measurable upside and a downside risk of insufferable pain, Lasik surgery is actually a bad decision. A risk management expert would decide against the procedure. Don’t be deceived by the high statistics, as a small percentage of people experiencing complications chose to end their lives.
Measure the Return
If you choose to take a risk, you should be able to measure your potential return. Why invest time or money without knowing your payoff? As an example, you may be debating whether to buy a house or rent an apartment. You hate the idea of “throwing money away” on rent, but you’re also worried about the closing costs that come with buying a home. How do you choose which option to go with? We can look at the downsides and upsides of each option.
Downsides of Renting
- Your monthly rental payment is the full extent of your financial downside risk
- You are forgoing potential appreciation in a home. This is your opportunity cost
Upsides of Renting
- Maintenance costs are not your responsibility
- You can leave after the lease expires
- You do not need to pay property taxes
Downsides of Buying
- Upfront costs are high (downpayment, closing costs, etc.)
- You are responsible for maintaining your home (paying for and performing fixes)
- Homeowners must pay property taxes
- Buyers who purchased a mortgage must pay interest costs to their lenders
- Homeowners must stay in one location until they can rent or sell their home
Upsides of Buying
- The value of your home may appreciate, so it may ultimately be worth more than you paid for it
- Financial expenditures can be recovered upon the sale of your home. Positive returns may also be realized if the value of the home appreciated over time
- Homeowners can rent out their home and make additional income
Listing out the upsides and downsides of each option makes it easier to decide whether to rent or buy. You can add up the costs associated with home ownership and see whether the initial investment is possible. You can then see whether homes in the area you are thinking of moving to have appreciated in value over time. Do you think you’ll be staying in the area for a long time? This may be the sole criterion used to make the decision. Lastly, you can consider the potential return you would make relative to alternative investments you can make with the same amount of money. Deciding whether to rent or buy may not be easy. However, taking the time to measure the upside helps you properly manage the risk involved in the decision.
You’re offered an experimental treatment at the hospital. Do you take it? If it’s your only hope of survival, then of course you take it! Evaluating alternatives is key to the risk management process. Are there alternatives to Lasik? Yes, you can simply continue wearing glasses. Without any devastating consequences of sticking with glasses, the decision to forgo Lasik should be an easy one to make.
When making decisions, we manage risk by assessing the upside benefits and downside perils of each option. If there are asymmetries skewed to the downside associated with one of the options, then you should decide on an alternative with limited downside risk. If SHTF one day, then each decision we make is going to have more riding on it. By internalizing the fundamentals of risk management, we’re already limiting our downside.
Do you have tips on risk management? Leave a comment below or contact me directly.