Monday, August 17, 2009

Avoid Risking Catastrophic Downsides for Low Upsides

Although my career was in R&D, I worked in enough plants to be an honorary manufacturing worker. As a result, I've learned to never do anything that is unsafe, even if the risk of danger is extremely small. The reason is that there is very little upside, e.g. a few seconds saved, versus a catastrophic downside, e.g. losing a limb or life. Unfortunately, in real life, people regularly take small risks that occasionally result is catastrophes. Here are some risks I that I like to avoid:
  • Reaching into live equipment. In our plants, people are not allowed to reach into moving equipment or work on equipment can be switched on accidentally. However, in the real world, people try to dislodge toast without unplugging the appliance, put utensils or a hand in a garbage disposal, or working on a lawnmower engine without disconnecting the spark plug.

    In 99.99% of the cases, nothing happens. However, if something should happen, the injury could be big. Personally, I don't work on any equipment until it is unable to be activated, either accidentally or on purpose.

  • Not using a seatbelt. I've always buckled my seatbelt since a high school friend was killed in a car accident. It's such a habit that I even buckle up to move the car in our driveway.

    Most of the time, the drive is uneventful and I don't need a seatbelt. However, a seatbelt has saved my life or prevented serious injury three times in my life. In two of the cases, the accident was caused by others.

  • Leaving a child in a parked car. Every summer there are stories of people who leave their children in a parked car for an extended period, resulting in the death of the child. In some cases, the parent just forgot the child was in the car and went to work.

    Our solution is to never ever leave our daughter in the car, even when we are only away for a short moment. That way, we are always consciously aware of our daughter's location. If leaving her in the car became the norm, a distraction could keep us away for awhile, leading to a potentially catastrophic outcome.

  • Risking large losses for small gains. For investing, a great example is selling short term way out-of-the-money puts on indices. The person writing the put makes a small premium, with relatively low risk of loss. This works well in a rising or flat market. However, when the market falls steeply as it did in October, 1987 and October, 2008, some investors incurred significant losses that wiped out their gains plus much more.
  • To me, risk is not bad. However, taking potentially big risks which have low upside gains are not worth it.

    For more on Strategies and Plans, check back every Monday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2009 Achievement Catalyst, LLC

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