Two Kinds of Risk, Four Kinds of Luck, and That Worst Outcome
Part 2 of 2 on managing the odds for career success
Hello 👋
Last week was about expected value. The sum of the potential upside and downside of a decision. Last week we spoke about how we can get paralyzed by risk and not do the work to find the expected value of a decision. Leave life-changing money on the table because we’re too scared to play.
This week we’re going to look into what it takes to play. This week is about how to manage the odds for success. It’s about risk in career-building. And where there’s risk, luck cannot be far away. So, we talk about luck as well. Four kinds of it to go with two kinds of risk. And finally, we talk—wonder of wonders—about how to make your own luck.
Highlights this week:
Our careers pan out in markets that are of two fundamental kinds. Winner-Takes-All AND Win-Even-When-You-Lose.
Each kind of market carries a kind of risk. Winner-Takes-All risk is boom or bust. Win-Even-When-You-Lose is more finely grained.
Trying for a highly competitive exam may offer no payoff other than the specific benefits of being on a short merit list but even failing at starting a business may equip us with unique marketable skills and social capital.
There’s a third kind of risk. It is the risk of being trapped in a career we don’t find meaning in. This kind doesn’t stand up to math so is often late to be spotted. For the true path-breakers, this is the worst kind of risk.
Just like risk, what is often misunderstood is luck. There is luck that we can make happen by being bold and by being prepared.
Luck from Motion can fatten our chances of success. Luck from Awareness can position us well for any future.
Our deepest fears point us in the direction of what we value most. For most of history, that was food, shelter, and clothing. Today, that’s a purposeful life. How we learn to respond to fear determines where we end up.
Two kinds of risk
Risk is your tolerance for the worst outcome. There are two kinds of risk going by that definition.
1️⃣Winner-Takes-All risk: You either get all or you’re left with nothing. If you win, you get all the spoils. If you lose, you get nothing.
In India, the civil services exams are a big deal. Held over a rigorous three rounds, they cull the nation’s most talented graduates from many other perfectly serviceable grades of talent. Only a few hundred candidates get through all three rounds on the merit list, making up a success percentage of 0.2%. The prestige of the exams comes from the scarcity at the top—a tell-tale sign of a winner-takes-all market.
In such a market, the only way you can influence results is by exhibiting a specific skill better than others. This could be the skill of acing a highly competitive exam, or writing scripts for network television, or running a hundred meters faster than anyone else in history.
🚩PS: I was talking yesterday with a friend who sat for the civil services exam a couple of years ago and, among other things like job security and purpose, she mentioned—having been an MBA from an elite business school and having had the opportunity to join/found startups—that her assessment of risk between the civil services and a startup was related to her sphere of control. She reckoned that more elements were in her control preparing for an exam than in launching a new venture, and that influenced her choice given similar odds of success.
My sense is that the decision is not related as much to control. It is not as directly related to control because (1) we choose to get on airplanes where we have zero control over choice of aircraft, pilot, or weather and (2) our choice of careers is affected non-trivially by our immediate environment.
The decision is not related as much to control as it is to available evidence and the way we absorb it. We favor evidence that supports our beliefs and dismiss evidence that challenges beliefs. That is confirmation bias. Having access to the same information as someone else, we may appraise it differently because of the difference in level of confidence in what we see or hear.
2️⃣Win-Even-When-You-Lose risk: If your target is running a marathon, a winner-takes-all market doesn’t reward you if you fall short of your target even in the last mile. The accounting happens only with respect to the finish line. But that is flipped in a win-even-when-you-lose market. The rewards are outsized if you win. But losing does not take you back to the starting line, or worse. You are still rewarded for the ground you’ve covered from the starting line.
Building a business is an example of win-even-when-you-lose risk. You may fail to take it off the ground and end up poorer by a few years of your life and most, if not all, your life savings. The experience of taking your own venture off the ground, though, will equip you with highly marketable qualities such as hiring, selling, fund-raising, understanding of business functions apart from the non-tangibles such as handling stress, managing expectations, and deciding in uncertainty. You also raise your social capital by building a valuable network of investors, collaborators, and talent.
Success in a win-even-when-you-lose market relies on your unique talent stack, not on any one narrow skill. You can be good at a bunch of complementary skills that allow you to mix and match them for a variety of excellent outcomes. Scott Adams, in his book How to Fail at Almost Everything and Still Win Big, has a formula for this:
Good + Good > Excellent
It’s better being reasonably proficient at two complementary skills than striving to be excellent at one narrow skill. This equation holds up in a win-even-when-you-lose market.
The first two don’t matter when there’s a third kind of risk
There’s a third kind of risk. To some it is the worst kind. But most of the time we do not talk about this kind of risk. We talk around it without really calling it out. Mostly because it does not fit any straight-up rational analysis. We’re saddled with this risk when we have amassed every last drop of utility but just not in the currency we want.
This kind of risk I’m talking about is existential. It is the deepest threat to the reason for our being.
Consider these numbers about Ray Bradbury, acclaimed American sci-fi writer. He made…
0$ in year 1
0$ in year 2
10$ in year 3
40$ in year 4
80$ in year 5
200$ in year 6
Michael Simmons, who does some fantastic curation of what drives a certain class of top performers, says this of Bradbury:
This means it took Bradbury 10 years after setting out to become a professional writer to actually become one and make a middle-class $50,000 salary.
While these numbers may sound brutal, they reflect reality. At least the typical reality for almost anyone capitalizing on a skill whether it be a creator, an innovator, an artist, or an entrepreneur.
Eleven years of tunneling before daylight. Or was it as bad? Why did Bradbury keep at it, this writing thing? Because he loved it. The worst outcome possible for him was a life without writing.
To anyone who doesn’t understand this childlike drive, the simple math of Bradbury’s early years make no sense. What the math conceals is a simple truth: If you’re doing what you love, being paid for it is a bonus. You only need enough to get by (although Bradbury fell short even by those modest standards).
‘Unless you’re a mad man,’ says Bradbury, ‘you can’t make do in the art fields.’ He might as well have been speaking for the rest of the tunneling brigade of artists, physicists, entrepreneurs, and innovators.
In a telling passage, Elon Musk pauses for a full ten seconds in response to a question on what drives him to chase big long-shot problems, before answering:
My source of strength, hmm? That’s really not how I think about things. Umm… I mean, for me it’s simply this is something that’s important to get done and… we should keep doing it, or die trying.
The common thread between Bradbury and Musk is that they both made choices that at first eliminated this third kind of risk from the equation. They made sure they were not trapped doing things that didn’t sit right with their purpose in life for which they needed things like strength and motivation.
How to know if you love something as much? Ask: If whatever I’m trying to do here took twice as long and paid half as much, would I still do it?
If your answer is yes, you have rooted out the third kind of risk from your career choice.
PS: Most of us find that our love for a chosen line of work falls short of a passion the hard way. When we find mornings hard or we believe in something called a work week and we religiously count down the days in it.
Luck
Hard pursuits in life are hard because they’re uncertain. The odds of success are low. This is well-understood by people.
What is much less grasped is that we have by our actions the power to change these odds. This is not a directly enforceable power. There’s no Press a Button and Collect Gold Coins. But time and again, those who are bold, those who are prepared, those who are unique, change the odds in their favor. A lot of this is painted with the broad brush of luck. We will steer past that kind of folly.
Following the direction of neurologist Dr. James Austin who published in 1978 a book entitled Chase, Chance, & Creativity: The Lucky Art of Novelty, there are four kinds of luck:
1️⃣Blind Luck - Stroke of luck that has nothing to do with you. You didn’t go looking for it, you didn’t do a thing but it fell into your lap.
2️⃣Luck from Motion - You cast hopeful nets, lots of them, and thanks to your enterprise and diligence, one (or more) of them catches a big fish.
3️⃣Luck from Awareness - You spot useful opportunities most others don’t. Or can’t. Because they lack the background domain expertise or social capital you’ve built to make something of that opportunity.
4️⃣Luck from Uniqueness - Your unique set of skills helps you attract this kind of luck. Remember the Thai cave rescue of a boys’ football team? Remember the two middle-aged divers who were called all the way from Britain to mount the rescue effort because no one else in the world could do what they did?
Blind Luck and Luck from Uniqueness are unsought. They happen to us. We’re concerned here with the two others kinds such that we can design a life that ups our chances of scoring big.
Making luck
Luck from Motion has a non-trivial correlation with agency. It has some desirable knock-on effects.
👉It deepens self-knowledge. The process of writing a book proposal, making a submission for the Yidan Prize, or asking for lunch with your role model teaches you something new about yourself, about what you want in life.
👉It nudges you closer to new discoveries. The process of trial and error produces new information in low-risk environments. You can make mistakes, like in a video game, and learn from each iteration, so that the next time round you know what to do to advance to the next round. Tim Urban illustrates it well:
If there were two scientists trying to come up with a breakthrough in cancer treatment, and the first one is trying every bold thing he can imagine, failing left and right and learning something each time, while the second one is determined not to have any failures so is making sure his experiments are similar to others that have already been proven to work—which scientist would you bet on?
Luck from Awareness is all about position. In fact, I would call it luck from positioning. You can make such luck by putting yourself in a position to take advantage of circumstances, no matter what they turn out to be. The best decision-makers rarely depend on one version of the future turning out as predicted. They position themselves to benefit from whichever way the pendulum swings. Warren Buffet is likely to win, relative to most others, if the stock market crashes or surges.
You may think the math doesn’t make sense. In life the outcomes are not zero sum. During periods of upheaval, new wealth, new knowledge are created. If you’re positioned well, you can gain disproportionately from new wealth and knowledge. First come, first served.
Are path-breaking entrepreneurs and innovators risk-takers or risk-mitigators?
In Part 1 of this two-part essay, we looked at any decision as being made of two parts—the part that scares us and that which we ignore. We exhumed the part we tend to ignore, which is the total potential utility of a decision (expected value). We concluded that the expected value of a decision is a function of not just probability but also pay-off and that we bury the pay-off when the probability of success is low. That’s a mistake. Most new business ventures have low odds going for them but the pay-off is orders of magnitude more than the average good outcome. That means paying attention to the expected value in making decisions about following an entrepreneurial path versus sticking to your seemingly safer job.
In Part 2 this week, we turned our attention over to the part that scares us–risk. We looked at risk in career choices. We reasoned that our careers can pan out in markets that are of two fundamental kinds, each posing a different kind of threat. We called these two kinds of risk Winner-Takes-All AND Win-Even-When-You-Lose. We reasoned that the entrepreneurial path offers a non-zero pay-off when the ultimate goal of building a successful startup may elude us. This is important to grasp because it suggests that in a win-even-when-you-lose market, the outcomes are non-binary. They’re not boom or bust like in a Winner-Takes-All market. Instead, they offer infinite gradience based on how we can mix and match our unique skills.
Path-breakers follow the scent of their fears, knowing that it will lead them to their most cherished treasure. This is often lauded as courage by the world at large but in truth is a more realistic estimation of risk. The ones doing something novel know this in their core. They get that our deepest fears are there to point us in the direction of what we value most. For most of history, that was food, shelter, and clothing. Today it’s a purposeful life.
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For the last several fortnights, I’ve been running a closed-group community for those keen to level up their decision-making. I’ve collected key nuggets from over five hours of live teaching and tens more in async discussions in one toolkit. I would love to share it with you and incorporate your feedback. Hit me up (with the subject line Framing) at satyajit@satyajitrout.com and I’ll send you the freebie!
Until then 👋