Last week I discussed how humans are wired to pay attention to scary things. In financial speak: risk. Darwinism has chastised those who ignore risk by rewarding them with an early grave, and by process of elimination rewarded those who stay out of the cross hairs.

Thing is, we no longer live in a world where saber-toothed tigers threaten our existence. In today’s world far greater risk lies in the truly enormous and disproportionate emotional attitude to (and assessment of) risk.

This has nothing to do with Darwin but rather more to do with an educational system designed and built for the industrial age. Education today is an advertising agency which leads us to believe we need the society on which it relies upon for its existence.

Beginning with the schooling system and followed by “higher education”, the middle and upper middle class in developed societies are by and large serfs. And they’re serfs because they don’t understand risk.

The overwhelming majority look at risk incorrectly. They look at it two dimensionally: “The more risk I take the more ‘volatility’ I have.” The fact is, risk is actually subjective to your own personal situation. Mismanaging your own personal situation increases risk disproportionately.

Let me give you an example of how easily an otherwise intelligent person gets royally screwed by the system by routinely miscalculating risk.

Let’s take Harry, a fictional guy from a middle class family who’s just left high school. Harry really wants to get ahead and has set himself a goal of becoming a millionaire by the time he’s 25. He figures that by 35 he’ll be worth north of $10 million.

Truthfully these figures don’t mean much to him but he’s had a small taste of the life and he knows it costs. There was that time he was trying to impress a brunette, and they dined at one of David Chang’s NY restaurants and he still remembers the almost palpable smell of money in the air as diners around him flashed Hublots, diamond necklaces and sophistication.

He remembers how the waiter unscrewed the cap of the water as though defusing a nuclear bomb. And although the beef he ordered was so thin that he had to lick it off the plate because it kept falling off the fork, his friends were really impressed and the girl so floored that she showed her appreciation by keeping him up all night.

The first thing poor Harry is told is to get an education. And so he does just that. Years of schooling have failed to developed in him critical thought. And so, though he has access to almost every resource one can think of, and at a cost approaching zero, he automatically associates education with a four-walled institution where people who like books theorize on how the real world operates, most never having experienced it first hand.

Here he spends 3 years getting into girls’ pants, drinking too much and associating with the same type of people as himself, which does little to develop his critical thought processes. Harry is rewarded with two pieces of paper. One represents his qualification and the other represents the six figure debt he now owes. Remember that the knowledge acquired between the drinking and sex is already free.


This is Harry’s first critical step in miscalculating risk. He exits university with a piece of paper and the world skills and street-smarts of a juvenile because his free time has been spent drinking and test driving anything in a skirt. Most importantly his future income is already tied up in debt repayments.

Fresh out of university Harry now has two doors ahead of him…

The Red Door

Choosing the red door takes Harry into a job. This promises a monthly revenue stream which appears to offer security and consistency. The lure is strong. After all the need to pay off his student debt lurks high on Harry’s list. He’s excited to put himself to test in the “real world” and believes that he can really target becoming wealthy once he’s got his student debt paid off and a few years under his belt.

The Green Door

Here Harry must take his skills learned and rapidly obtain an education. A real education. He will need to do this by becoming an entrepreneur and building his own outcome. This option offers no monthly revenue stream and no security or consistency. It also offers unlimited upside and a real, not imagined, shot at becoming wealthy.

Unfortunately, Harry has a distorted view of risk for two reasons:

  1. He has debt and must make debt payments. This distorts his view of real risk.
  2. He doesn’t have an education which shows him the real cost of risk.

The red door option appears far less risky than the green door option. After all, none of  Harry’s friends are doing this and when he brought up the topic with his parents they nearly blew a gasket. “Don’t give up your future so early on,” they pleaded.  Once again, poor Harry’s lack of critical thought gets the better of him and he takes the red door believing it to be less risky.

Cubicle Hell

Fast forward a few years into cubicle hell and Harry is now earning $60,000 a year. His student debts are easily manageable and in an attempt to get ahead, Harry buys a house, reasoning that he needs somewhere to live and this is the first step towards fulfilling his goal of becoming wealthy.

He reasons that buying the house is a step in the right direction, but he hates his job more every day and it’s now dawned on him that it’s a long hard slog up the corporate ladder in order to earn the sort of money that can make him wealthy.

Once again, he’s faced with a dilemma. Does Harry risk kicking in the job and starting a business of his own, doing something that he really loves, or does he stay put?

And This Is How Harry Analyses The Risk

Scratching at his now receding hairline he thinks to himself, “I can’t take the risk of starting my own business because it may fail.”

The downside now is losing not only the $60,000 salary but defaulting on the payments now tied to this revenue stream. The risk is no longer $60,000. The risk now is in losing the ability to keep up student debt payments as well as mortgage payments.

Pretty soon he’ll fill that house he bought with “stuff” which will either come on hire purchase or simply be added to his mortgage. He lies to himself saying, “Hey, at least I’ve got the income, which I wouldn’t have had without the college education. And at least I’m on my way up because I now own an asset.”

Wrong! On So Many Levels…

Here is how Harry should analyse risk for something as simple as deciding whether to quit a $60,000 a year job or not in favour of having a crack at becoming wealthy.

Let’s look at the downside: if Harry has a job paying $60,000, chances are he’ll be able to pick up another paying $60,000.

Let’s say that those chances are 60%. So he has a 60% chance of getting back to where he is now if he screws up.


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