Asymmetrical risk is the concept of taking a risk that will produce a return that far surpasses the risk taken. This is a really important concept that can change your quality of life greatly. Yet, the idea of leveraging asymmetrical risk is not really emphasized in today’s world.
Asymmetrical risk is like using a lever and prop to move a large boulder. There are times when the lever will snap in half, there will be times when the prop is crushed by the pressure applied, but there will also be times when the boulder is moved. Without asymmetrical risk being present, it is similar to pushing that large boulder with your bare bands, in a futile hope of trying to move it.
My opinion is that when you are presented with an opportunity of asymmetrical risk, you should always, without fail, take it. As I have thought through this concept, I realized there are many aspects to consider for asymmetrical risk.
Asymmetrical risk applies to all corners of life and throughout the ages. In George S. Glason’s famous book “The Richest Man in Babylon”, a merchant was trapped outside the city walls because it was night time. It would be morning before the gates to the city would open. The merchant had just come back from selling his wares and had quite a hefty amount of gold coins on him. As he began to light his bonfire to camp outside, he began to hear the bleating of a flock of sheep.
Another merchant, a sheep master, had arrived with this flock. They made their introductions and the sheep master mentioned he lived nearby and wanted to sell his sheep for a good price in the morning. Suddenly, a house servant of the sheep master arrived and with bated breath warned his master that one of his sons was gravely injured in an accident. The sheep master was extremely worried, and told the merchant he would sell all of the sheep at a discounted price so that he can hurry home to his son.
The sheep master mentioned that he had over 200 sheep with him. The merchant’s gold was just enough to cover the purchase price for all of the sheep. And the merchant knew from his experience that the other merchants in the city would pay at least twice the amount for 200 sheep. But there was no way to confirm this as it was too dark to count the sheep. The merchant was presented with an asymmetrical risk. The reward was he could make a quick profit by buying the sheep for cheap and selling it in the city for a higher price. The risk was that the old man might be lying to him and there are only 100 or 50 sheep in the flock. The merchant in the story ended up not buying the sheep.
So the old man decided to hurry home and left his servant there to sell the sheep in the morning. The next morning, when the gates opened other merchants came out and bid up the price of the sheep to four times the amount of gold the sheep master offered to the merchant. The first merchant had lost his chance to profit greatly because he did not take the asymmetrical risk.
There are definitely more recent examples of asymmetrical risk. Here is one from stock investing in recent times. If you invested in Amazon in 2001 during when the dot.com crash and held the stock to today, you would have made almost 300 times your initial investment. So if you invested $10,000 in Amazon in 1999 you would have made almost $3 million by today. But what if I told you that in 2001 the market had saw Amazon’s stock price go from over $100 in 2000 to just $5 in 2001, would you still invest?
This is an aspect of asymmetrical risk. You do not have perfect information. Perfect information having all the data needed to make the correct decision. In the case of Amazon, investors likely knew that ecommerce was a fast growing trend, but they did not know which company would thrive in it. When there are asymmetrical risk opportunities, but there will likely never be perfect information available for you to decide whether to take that opportunity.
Asymmetrical risk is present in our professional lives. When Google announced its IPO, it made 900 people instant millionaires. It is easy to say at the time or anytime after that joining or working for Google would be a good idea. Those instant millionaires paid a price. But they only paid a small price compared to the reward they got. Those 900 people took an asymmetrical risk opportunity to become instant millionaires. When Google was starting out, not many people were sure that it would become the company it would be today. There are definitely some employees that lost out opportunities at more established companies to work at Google. The price (read: risk) they would have paid if Google remained small is they would have been the loss of income and time. But the reward of becoming a millionaire offsets that easily.
This is yet another aspect of asymmetrical risk. This notion is that some times when you take on asymmetrical risk opportunities you will have to sacrifice your most valuable resource, your time. In the case of Google, if the company were to have flamed out, then the cost would also the loss of time to the employees and the founders. But that is likely mitigated by the experiences you gain while working there. Further, if an asymmetrical risk opportunity will take a lot of time to achieve, you should be sure that it is a worthy cause, or something you are passionate about.
Lastly, asymmetrical risk is also present in our social lives. Can you recall one conversation that you had or one experience that you had that changed your life for the better? The thing is you may have been presented with experiences or situations where if you acted they would have happened. The reward is the conversation/experience you would have had and the risk was the other party saying no. Many people are so scared of being overlooked that they do not take the asymmetrical risk and ask for the opportunity. If the other party says no, nothing will happen but if the other party says yes you open the doorway to great rewards.
This is the concept of asymmetrical risk. It does not favour those that stand still. Sometimes to attain the reward in an asymmetrical risk situation, you will have to risk your well-being or make a drastic change in your way of life. But often times, it does not require even great feats of action or effort. Sometimes all it requires is a decision, such as you asking a question, or you using a renewable resource (i.e. Money for investing).
Questions to identify some asymmetrical risk opportunities:
1. What can I spend money, a little time, and create value of asymmetrical risk
2. What is something you can read that can provide asymmetrical risk?
3. What is a skill you can develop that can generate asymmetrical risk?
4. What is a club/society/organization you can join outside of work and what are asymmetrical risks that can be generated from it.
5. What relationships do I have, that if cultivated further can create some possible asymmetrical risk opportunity. Resource consumed = time, money, willpower
What are some questions you would have to identify asymmetrical risk opportunities?