Why Safe Things Are Often the Riskiest

My 7-year-old son got two concussions playing hockey this year, which got me thinking. Hockey is a dangerous sport, with humans zinging around on sharpened blades swinging a curved stick. Like quidditch, but on ice (if it didn’t already exist, there is no way they would create this sport today).

To curtail injuries, hockey has made two changes over the years. One, players today wear a lot of padding. The photo on the left is in the early days of hockey and the right is today. The second change was a crackdown on fighting and specifically the use of enforcers (players whose main role was to fight). I think both of these changes have made hockey more dangerous.

Wearing more pads enables you to take more risks, to skate faster and hit harder. Hockey players today are bigger and faster than ever, and increased padding simply removes the caution sign.

Enforcers used to be important players on teams, tasked with protecting the stars, who were often the targets of big hits. Knowing that a Dave Semenko was on the bench made guys think twice before delivering a dirty hit on Wayne Gretzky, and this created a nice Mutually Assured Destruction dynamic. Today, with no enforcers, there is little accountability and the game’s best players such as Sidney Crosby get hammered with little retribution.

In both cases, the league has tried to increase safety, and might have, but only over the short run. This dynamic of short-term safe = long-term risky is common, and comes in two varieties. In the first, the existence of protection impacts our behavior. This is like the hockey pads. We take more risks when we have health insurance. By government decree, we all wear safety belts, but almost certainly drive more aggressively due to them. For true safety, manufacturers should install a sharp pole sticking out of the steering wheel and for real hockey safety, there would be no pads at all (but keep the helmets). In both cases small injuries would increase, but life-threatening injuries would decrease.

The second type of short-term safe = long-term risky is driven by feedback loops. The cycle usually runs like this: something is safe, so everybody does it. Everybody doing it gives the impression of stability. But everybody doing it inherently makes it unstable. As Mark Twain wrote, “whenever you find yourself on the side of the majority, it is time to pause and reflect”.

If we look around we see this pattern in many areas of life.

Career

Where I grew up, most of my friends’ dads worked in the woods as loggers. So, many of my friends became loggers. While not safe physically, this was an emotionally safe choice. The same process happened in mill and factory towns across the country over the past 40 years. Over time, many of these jobs have been lost to outsourcing or automation, making that initial safe decision very risky. Today becoming an accountant today is risky (although very physically safe!) due to threats from AI. Borrowing $100,000 to get a law degree is risky. The thing that feels the safest is probably the easiest to automate.

The uncomfortable truth is that to be safe in a career, we must continually take risks and remain uncomfortable.

Parenting

What is the main objective of parenting? Is it to keep the kids safe? If we keep them safe from germs, bullying and failure today, aren’t we increasing the risks of future, fear and risk-aversion down the road?

Hand cleanser keeps kids safe today from the very small risk of a cold. However, it weakens the immune system and increases larger risks down the road. It’s a classic asymmetric risk (picking up nickels in front of a steamroller) that has ruined many traders and gamblers. Similarly, it feels safer to not let kids walk or bike to school, so instead we drive them. The bigger risk is not developing the independence of children. Not letting kids play sports is similarly short term safe, long term risky.

The right answer to the objective of parenting? I would argue it is “creating useful adults” and to do that, they must take risks so great that they make us (the parents) uncomfortable.

Investing

In investing, something seems attractive so it gets bought, driving the price goes up. The higher price attracts more people since its good performance makes it seem “safe”. This historical stability persuades people to take more and more risks, which causes the safe to become risky. Stability leads to instability. This dynamic is at play in every cycle and every business cycle.

Financial models such as Value at Risk (VaR) fall prey to exactly this safe = risky fallacy. VaR models incentivize investors to overweight securities with low historical volatility. This increases the prices of those assets, which increases risk, and the probability of future corrections. In reality, it is safer to invest in things that are cheap than those that are expensive, but this is uncomfortable and against our human instincts.

Business

It is very hard for successful companies to make big changes, as the plain fact of the historic success appears to remove the need. Continuing what has worked appears to be the safe strategy (and is, in the near term). However, in a world of constant disruption, staying on the same path is often the riskiest long-term strategy.

Blockbuster had a very successful business renting out videos. They could clearly see the threat of technology on their business. But changing direction toward streaming would have required new investment, potentially killing off existing business lines and upsetting some employees. Entrenched interests are often more than happy with the status quote. Again, the difference between near-term risk and long-term risk. Contrast that to Netflix, which willingly killed its disc-shipping business to move into streaming. Or Apple, which killed the iPod with the introduction of the iPhone. Or Disney’s recent introduction of the Disney+, killing off revenue rights it was getting from other distributors for its content. These examples are notable because they are rare. These companies chose to be uncomfortable.

This dynamic of trading off near term risks for long term risks is really everywhere, in our personal lives, our careers and definitely our politics. Upon reflection, the key constant is the decision to continually seek out discomfort, to make choices that cause some near-term anguish, recognizing that because it is hard, few will do it, and that will make it valuable.