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I couldn’t have been more than 5 to 7 years old when my dad taught me about volume discounts in the grocery store.  Lessons on storage costs and the time value of money followed close behind.  My friends from school still laugh about these childhood stories.  By middle school I was learning about pari-mutuel wagering (at Woodbine Racetrack) and Dad would explain to me that risk drives rewards.  He said that he did not gamble but that he took calculated risks.  By high school I was trying to program a calculator to work out the expected payout of a horse running third in a race.

Why third?  My dad’s approach to risk management was to find a horse that in his opinion could not lose – then consider that in every race there are random events that cause a sure winner to come second or third but rarely finishing ‘out of the money’.  He could calculate in his head the payout his sure winner would pay for betting him to show (finish first, second or third) and if he could get $3 for every $2 wagered, he would bet the farm.  A 50% return for a two-minute race was loads of excitement.  He could go to the track for a ten-race card and only bet on three races, often going home at the end of the 8^th.  Some might think that hiring a baby sitter would be more appropriate for a young child but for me some of my best memories and adventures started driving through the gates on Carlingview Drive.

I assure you that I didn’t inherit my dad’s eye for spotting a winner or his discipline for folding bad cards.  I am just home from my annual reunion with the guys from university.  I lost $40 playing poker – and if it weren’t such a common occurrence you would think I would have lost my dignity coming in last place again.

The point to the story is that I grew up around the idea that taking risks is what drives rewards.  I play poker for the entertainment not for the rewards (if only more young men could understand this).

Schrager

Allison Schrager is someone who appears in my endless reading pile.  Ms. Schrager calls herself a ‘retirement economist’.  We have never met so I can’t call her Allison or ‘my friend’ but I am sure she would find me entertaining if she met me.  She regularly mentions actuaries and tips her hat to the work we do bringing probability theory to risk management.  Although she is not an actuary, she is no dummy, she has a PhD in economics, but more importantly, she writes with a nice balance between ‘smart’ and ‘accessible’.

She recently published her book Worth the Risk with the subtitle The Seven Myths That Keep Us from Taking the Chances We Need to Take.  Of course, the word risk in the title was attractive, but what really caught my attention was the idea that many of us are not taking the risks we need to take.  My kids are in their mid-20s and I wish I could have a do-over guiding them – not that they would listen the next time around.  I think a lot about how Generation Z is going to navigate the unfolding world as we hear regular reports that the cards are stacked against them.  Maybe, just maybe, this book has the answers.

Early in the book, Schrager says, “if actuaries ruled the world, maybe we’d all learn probability theory in preschool…”.  I have two concerns with this statement.  First, most actuaries I know would probably be very happy if everyone would learn probability theory by the end of high school.  Second, she seems unaware that actuaries do rule the world.  Sure, lawyers get all the front-line attention telling you what you should and shouldn’t do – but it’s the actuaries who price these choices and nudge your life forward with financial incentives.

Thesis

Setting aside my small grievances, Schrager’s main thesis is brilliant.  As we get richer and richer as a society, we are becoming less risk tolerant.  This lack of risk taking actually drives greater inequality and increases our fears of the downside outcomes.  Essentially, playing it safe is not free but shows up in the forgone increases in wealth that come with taking risks that pay off.  The challenge is deciding what risks to take.

I suspect that some actuaries who are established in their careers, earning a good income, and living a comfortable life wish they could jump ship and do something ‘risky’.  Given how much fun I have had in my career so far and how reluctant I am to retire and leave it behind, you might conclude that everyone should want to live a freewheeling entrepreneurial life.

That said, there are three things to consider.  First, how much of a stomach do you and your family have for the uncertainty that comes from starting and running a business?  Second, how much financial reserves do you have to finance the early years?  Third, how good do you have it where you are now?

On the third subject, we started ASI at a time when it was becoming more and more clear to me that the big firms downtown Toronto would not be my home.  In a pivotal conversation with Nick Crook, then the manager of Towers Perrin’s office in Toronto, Nick said “Joe, you wouldn’t fit here because you are someone that marches to the beat of your own drum”.  It wasn’t meant as an insult, just a sound analysis of the type of person that fits in his organization (embracing structure) and the very different person that I was.  Nick directed me to a Harvard Business Review article that pointed somewhat towards doing my own thing.  My point is that starting ASI might not have been as big a risk as others imagine because the alternatives that I had were not as lucrative as others have created for themselves.

Choose Your Safe

One expression I like is “choose your hard”.  The idea being that sooner or later in life you are going to face hardship.  Try to take the easy road in school and you may end up having a hard time finding good employment and/or have a long career with a lower income.  Neglect your fitness and diet because it’s easier than the discipline needed to take care of your health, and you may end up with a tough life at the end with all sorts of health problems and/or early death.  It’s simple – sooner or later you face hard times – the key is to choose if you want to face them when you are young or when you are old.

Schrager helps us think about choosing risk over safe.  This is the wisdom threading through the book.  But I don’t think this is a ‘zero or one’ concept.  Instead, I think each individual needs to choose their ‘safe’ and at the same time choose the right risks.

When we bought our first house, we spent half of what the bank said that we could afford.  We used the income that didn’t go to the minimum mortgage payments to pay off the mortgage more than a decade early.  We didn’t move up until we were mortgage free and even today, we are in a less expensive house than we can ‘afford’.  For us, this was choosing our safe.  Interestingly, had we always bought bigger houses and taken on bigger mortgages, given the path of housing prices and interest would have meant that we would have won bigger in the housing game.  But that is in retrospect and there is no economic rule that would have guaranteed that path.  We chose our safe.

But when I had the crazy (or brilliant) idea to start ASI, everyone recognized it was a risk – lots of upside reward and lots of downside disappointment including financial loss.  But because we had chosen ‘safe’ on the house side of the ledger, we were better positioned to ‘risk’ on the employment side.  One salary could carry the minimum mortgage payments, and we had room to take a chance on my income.  Again, in retrospect this worked out – but it might have gone badly and having a safe choice in housing was the needed counterbalance.  When we moved from Oakville to Windsor, there was a risk that ASI might stagnate or die – there was also greater safety in a lower cost of living.

I know many people that would never be comfortable starting a business but are very comfortable in the big house – big mortgage world.  For them, housing feels like a risk that they can handle and for employment they prefer ‘safe’ which means a predictable paycheque from a stable company.  Notwithstanding the social media gurus that think everyone should start a business, I just don’t think that is right.  Starting a business is a risk and it’s not for everyone for all sorts of reasons.

More than anything, the takeaway should be about neither playing it safe with every decision nor risking it all every day of the week.  Find the right risks, choose the important times to play it safe.

One final observation, the younger you are the more risk taking is asymmetrical.  When you live with your parents, failing rarely means losing your home or not having food on the table.  But the upside of making something work in your 20s has a high ceiling.  That doesn’t mean everyone has to start a business – but it does open the door to taking a job at a less established firm, trying a career that might not work out, moving to a city/country away from home.

Tell the kids: choose your risk.