"Superficially I think it looks like entrepreneurs have a high tolerance for risk, But one of the most important phrases in my life is 'Protect the Downside'"
-Sir Richard Branson
Richard Branson is aware of the mysterious power in an non-linear asymmetrical equation. He didn't give a blanket admonishment awash in hidebound conservatism. Branson's experienced observation relates his formula as a successful entrepreneur and self-made billionaire. Awareness of the equation - convex or concave - is the heart of long-term growth. Why? Because awareness is step 1 when it comes to harnessing optionality. Awareness lets you "buy" more convex options - where you can only lose as much as the option costs. Asking will allow you to avoid concave options, protecting yourself from harm. If the downside is protected then the upside will take care of itself. With the downside protected you can live to fight another day. Branson's sanguine aphorism adumbrates this simple truth. It is why he has had such success.
The payoff or harm of an option is not quantifiable beforehand. The binary choice - A or B, 0 or 1, convex of concave - is all we can hope to answer. For instance, the choice 'should I speed on the freeway?' illustrates this point. On one hand, by speeding you can get home faster by every MPH you go over the speed limit. On the other hand, for every MPH you go over the speed limit the risk of a serious car crash goes up until it becomes 100%. This is what I mean by concave options - small known gain vs huge unknown loss. Look at the extremes. Getting home faster vs serious car crash. It's a no-brainer. Why pick up pennies in front of a steam roller?
Over time, these innocuous choices add up to either a debit or a credit on your life account. Like a personal balance sheet: Assets - Liabilities = Equity. Equity is either positive or negative. The decisions we make accumulate, bringing our balance sheet up or down. Some payoffs are huge, the sky is the limit. The majority have little to no effect and still others make us pay huge. This equation doesn’t only apply to money either. Indeed, money and finances are the smallest aspect. Love, family, intelligence and fulfillment are colors used to paint your life's canvas.
Every decision has some degree of optionality baked into it. Many convex options don't cost a cent but - as a general rule - do cost something: time and/or effort. Think of reading a book. Beyond the small nominal price, the cost is the time spent reading and processing it. That’s it, it can never be more than that. Yet the upside is limitless. There are some books I’ve read that had a profound effect on me. They illuminate my view of reality like a fecund supernova. It's true that most have a mild to null effect. Yet every chance I have to read something that can shift my small window to this world is a chance worth taking. As long as you perform convex options, there is no need to worry. Good things happen; they always come, sometimes out of the blue. You can never know beforehand which will be that magic ticket into the stratosphere. If you knew beforehand, then there would be no need to perform the option. As Fredrich Hayek wrote, "The mind can never foresee its own advance." It's a paradox and we're trapped right in the middle. The more we want to control our fate, the more we end up 'selling' options for a small gain. The specter of calamity dangling like the sword of Damocles a hairs breath away. Control of upside is an illusion. The secret to capturing that unicorn is to put in the work, do the hard thing, sacrifice and make the extra effort. It's only through convex actions can one hope to be like "he on honeydew hath fed and drunk the milk of paradise"