Opportunity Costs

It is no big news that the ability of the human mind, to think perfectly rational and logical, is at best unimpressive.

We come preprogrammed with all sorts of mental biases, that we should be aware of, when we make important decisions, in order to account for any illogical proclivities.

I have benefited immensely myself, from learning about concepts such as The Sunk Cost Fallacy, Confirmation Bias and other ways in which we aren’t able to think clearly.

I discovered another flaw in my own thinking a year back, when I was still in my full-time position, and I was considering leaving it for a more uncertain job situation.

Back then, I hadn’t finally decided to quit yet.

A friend told me that a TED conference was being held in Copenhagen, and he asked me if I wanted to go. When I discovered that I couldn’t, because it was held during my regular working hours, I was reminded of what I was losing by staying with my company.

I primarily wanted to go that conference for my own entertainments sake, but I could never know what kind of interesting people I would meet there, and what opportunities that would present.

And I still don’t know what could have happened.

The point is, back then, my brain was mostly thinking in terms of having nothing (no job) or having something (a job) when I contemplated quitting.

I think that we all tent to do this. We underestimate the potential opportunities that lies ahead – when they are unknown –  if we decide to free our schedule from whatever it is we are doing right now.

I am not saying, that everyone should quit their job and open themselves up to unknown opportunties, obviously not.

I am just saying that we usually have potentially great options ahead of us, when we decide to stray off the fully known path, and that is something.

Our brains can’t really assign the correct value to this optionality, when it constructs it’s algorithms for decision making, and therefore we have to do it consciously for it.

Remember that just because the future is unknown, it doesn’t make it bad or dangerous by default. A positive outcome is just as likely if you work hard to influence it.

To get a first class life, you need to start living a first class life… Or what?

The headline above is aimed to describe an ideology that sometimes is able to threaten the confidence I have in the frugal lifestyle that I lead.

I recently heard the world-renowned strength coach Charles Poliquin say something to this effect, on the Tim Ferriss podcast, and he gave the example of his airplane travelling between the seminars he gives all over the world. He explained, that he always makes it a point to fly first class, to ensure that he gets a good night’s sleep on the plane, so he can show up refreshed for the seminars and give a first class performance, which ultimately results in repeat business with the customer. And it makes total sense, right?

To my ears though, what he was actually saying, was that the first class tickets were an investment that generated a long term positive return – and that you can’t really argue with.

But I think we should be careful not to oversimplify this idea, unless we want some impressionable people to get hurt from the advice.

Say I, as a young man, who is just getting started with life, goes out and takes an expensive loan to buy a Lamborghini, with the thought in mind that it will raise my overall standard of living. Maybe this expensive sports car can enhance my social status, which will allow me to establish relationships to rich people, who has business opportunities that I can capitalize on, and thereby be able to pay back the car. Is this a possibility? Probably! But what you may also call this, is “betting on dumb luck”, and I think that it may even slightly resemble some other popular self-help concepts such as The Law of Attraction and The Secret.

But I know a guy, who one day decided to start living the good life, had no basis for it, and suddenly had all the best things in the world flowing towards him”. This is called the survivorship bias. You probably also know a lot of other people who went bankrupt because they tried to jump 10 steps ahead in the game, without being particularly calculated about it – those examples we tend to forget.

You see, there is no luck involved in the case of the strength coach I mentioned before. He will hop on an air plane, check in to a hotel, give his lecture and go home again. All steps throughout the process are already known from the beginning. The first class tickets are just a way of optimizing this process (you may even define it as improving upon the value chain that is the product he delivers).

In the case of the Lamborghini, we are just optimizing or even amplifying uncertainty, instead of a known process, and that can only result in extreme outcomes – most likely a negative one.

I think the key lesson here, is that we should learn to be more calculated than just taking mindless head-dives into economic uncertainty. We should even be aware, that a luxurious lifestyle can hurt us sometimes. For example: the marketing genius Seth Godin talks about how he had to stop wearing expensive suits early in his carrier, because it resonated badly with the type of people he was trying to establish partnerships with.

In short, the better we are at anticipating the future, the more success we can expect. But hoping is never a strategy.

If you carefully estimate that a 1000-dollar suit is going to a give you a great return on the investment within the near future, then by all means, go ahead and buy it. But if reality says, that a 200-dollar model will get the same job done, I think only a fool would count on the law of attraction to do any other magic than just hollowing out one’s bank account.

The examples of the strength coach and the Lamborghini are opposite extremes of a spectrum, but we should always be careful not to lean too much towards the latter.

 

Thank you for reading

Max

The Barbell Principle (In Everything)

As you might know, if you follow me in any form, my favorite author of all time is Nassim Nicholas Taleb.

He is primarily known as an authority on the financial markets and risk management, but he is as well a philosopher in a general sense and a ruthless political commentator.

One of my favorite ideas in his latest and greatest book Antifragile, is something called The Barbell Principle.

He uses this concept to describe how you might want to invest your savings, if your goal is to stay unexposed to great risk, and also have real potential for profit. This is achieved by allocating the majority of your resources in completely secure assets – cash or equivalents – while putting the remaining minority in seriously volatile investments, like options.

This explains the name: you concentrate everything at either end of two extremes.

It allows you to sleep comfortably at night and still have a fast horse in the race.

Once you experiment with the principle, you find that it can be useful in many areas of life, since it often gives you the best of two worlds.

In training for a marathon, for instance, many coaches recommend a barbell–style training regiment, where you combine running very slowly for longer distances with sprint intervals. This is supposedly the most time-efficient way to improve, compared to training hour after hour at semi-high speeds.

You can take this approach to general luxuries. At one moment you live frugally, and enjoy the simple pleasures of life. Then, on occasions, you splurge and treat yourself, without making it a habit. This will enhance your feeling of appreciation and enjoyment, compared to always being semi-indulgent – a great defense against hedonic adaptations.

One more: you make sure you don’t sit in front of the computer all day, being semi-productive, mixed with random surfing. Instead, you sit down and get seriously productive in compressed and restricted time slots each day, and really make the allotted time count. The rest of the time, you stay away from the computer and do something else – that may even involve a little movement too.

Recently, I applied the barbell principle to my life in a new and profound way. I decided to quit my full-time job, in favor of a part-time job, in order to gain a greater potential for upside. How? Had I chosen to stay in my full-time position, I could easily have told you, what my personal worth would be in ten years from now. I could have estimated it, since I already knew my salary bracket and potential for promotions in the coming years.

On the other hand, with a part-time job, I will spend a part of my week making sure that I am able to pay my bills, but in the rest of my spare time, I will be able to work on my own entrepreneurial projects, that could potentially have upsides that are impossible to estimate. So now, I can safely say, that I will either do financially okay, or very good.

This also brings with it a greater sense of mystery and adventure, as the rest of my life won’t be decided for me in advance.

In what other areas of life can you apply the barbell principle, in order to improve your potential for upside?

//Max

Sit Back And Think

If I were to start my own religion, I would call it the “Sit-Back-And-Think” religion, because I think it is the way life should be lived.

It goes hand in hand with my idea about being Relentlessly Proactive, but here is the main idea:

Sitting back to think implies being non-reactive, introspective, well calculated, logical, strategic and executive.

Basically, it is about showing all the qualities you want, whenever you make an important decision – or any decision really.

If we approach life this way, by sitting back and thinking, we should experience more effectiveness/efficiency and less stress, as we would be able to get more of what we really want from life, with much less work. We world see things like a general instead of as a foot soldier, and thereby be able to better distribute resources, by minding the big picture.

President Lincoln has been quoted for saying, that he’d rather spend more time sharpening his axe, as opposed to working manically to cut down a tree with great effort. This is what I am talking about.

Even though all of this is just describing how we psychologically deal with life, I am a believer in embodying the qualities we want to express. That means, I think we should actually sit back in a chair physically, whenever we want to think deeply about something.

It is not that I think, the way you sit in a chair can improve brain function, but the idea is to make it a physical and conscious exercise, where you don’t do anything else but think about the problem at hand.

That means, back against the chair, hands away from the computer and eyes gazing straight forward without looking at anything in particular.

This is a physical manifestation of the mindset, that will more or less force you into the desired thought pattern.

Many people will say that they do think about their important problems from a higher perspective, but I refuse to believe they can do this, running around busy, doing stuff and do high-level thinking in a “multitaskingly” manner. Unless they are really sitting down and deliberately thinking, they aren’t doing it to their full capacity.

 

An Exercise

So here is how I suggest we implement the idea into our lives. And I will begin doing it myself from now on.

Every time a bigger concept, question or idea pops into my head, that I know will require some higher-level thinking to process, I will write it down in a specific section of my notebook. Then, I will try, whenever I have half an hour to spare, to think about a subject and see if I can reach a conclusion and ultimately write it down.

What do you think?

Would you join me in this practice? Or am I just wasting my time?

Sit back and think about it.

//Max