Calculated Gambles

How did you celebrate graduating from high school?

Looking back, I remember going to house parties where parents humble-bragged about the colleges their kids were going to, new graduates sneaked cheap beers to their basements, and answering the all-encompassing question far too many times, “So, what’s next?”

I knew I was headed off to college the upcoming fall. However, there was one thing I had to try first.

Skydiving.

So, about a week after walking across that stage, diploma in hand, I was climbing into a tiny Cessna Caravan with 10 of my friends to jump out of an airplane at 14,000 feet.

My family thought I was nuts. Why would anyone willingly jump out of the sky just to lose 300 bucks?

From a purely emotional perspective, it seems crazy and incredibly dangerous to skydive. Yet, statistically, the risk of injury today is near zero. We place skydiving as an extremely high-risk activity when in reality, it’s not nearly as much of a gamble as our minds drum it up to be.

Throughout our lives, we have to choose between two paths, the safe route or the risky route.

Due to our human nature, we are inclined to always take the safe route that will guarantee a greater level of comfort and thus be the “better” option.

After walking across that stage as high school graduates, we are all faced with a series of decisions that will diverge our paths.

Do I go to college? The military? A gap year?

Again, once we graduate from college or finish that gap year, we are faced with a similar dilemma.

Do I live at home? Move somewhere new? Go back to school? Start a business? Find a job?

Each of these decisions inherently has some level of risk involved. Going to university far from home, starting a business, or finding a job in a new city, are simply higher-risk options than attending college in your hometown, picking up a job at your local Chick-fil-A while at school, and following in the same career footsteps as your mom or dad.

Given our varying levels of risk tolerance, we will make decisions that best fit into our realm of comfort.

When we are young, we usually have a greater tolerance for said risk and as we grow older, this tolerance fades.

Surprisingly, I see a lot of my peers from the suburbs of Chicago as well as from my college in Indiana who are intelligent, ambitious, and curious make decisions that appear to have no risk at all. Many go to universities a few miles from their childhood homes, take on the first jobs they get an offer letter from, or move back in with their parents.

Interestingly, this trend is not unique to Chicago or Indiana. The Higher Education Research Insitute (HERI) has found on numerous fronts that students today are attending out-of-state universities at far lower rates than they did two decades ago. More than 42% of first-year students today go to school within 50 miles of home as opposed to only 33% in 1999.

After college, a similar trend has taken hold. A study by the U.S. Census Bureau and Harvard University found nearly 60% of young adults (measured at age 26) live within 10 miles of home.

I’m not here to make the case that going to school close to home or living nearby after school is inherently bad. Many people have valid reasons for doing so whether it’s to save money or take care of family.

I am here to raise the broader question, are less risky decisions always our best option?

When we make decisions that have a greater risk, usually that risk is the largest in the short term.

We fear the immediate consequences of doing something that is out of the ordinary or challenges the status quo and the negative repercussions of doing so. It is usually uncomfortable, stressful, or confusing.

Over time, that risk is mitigated significantly.

When you first enter college, it’s terrifying not knowing anybody or your environment. The lowest-risk option would be to go back home and live in your basement.

In investing, the market is incredibly fickle. Global events, supply chain disruptions, and even tweets by Elon Musk can seemingly flip commodities upside down. It’d be easier to just let your money sit in a low-interest savings account or physical cash.

In both cases, the better option is often to persist. While at college, you begin to acclimate to your environment, and the scary first few days may turn into the best four years of your life.

In investing, if you can weather the storms of the market and avoid selling, you may see greater value in the long run than stuffing all your money under your mattress.

In the long term, we see the outsized returns of choosing the bigger gamble.

No risk. No reward.

Never before have we as young people or professionals had greater optionality and control over how we choose to live and work. Unfortunately, it appears that we often gravitate towards comfort above uncapped growth opportunities.

When we are young, we should pursue these career opportunities, places, and environments where we can experience the greatest potential upsides at the lowest risks.

These “calculated gambles” should consider all that we could gain over time rather than simply the short-term cost, discomfort, and risk.

When we take more calculated gambles in our lives and use risk to our advantage, we are optimizing our decisions for growth, learning, and positive change down the road.

Calculated Gambling on A Macro Scale

How we approach risk and make decisions in the micro aspects of our lives isn’t much different from how our world operates at large.

Today, we see politicians, large corporations, and even our government choosing the paths of least resistance. We band-aid big problems or make bold propositions for change that fall short, failing to create systemic impact or growth.

Despite all of the quick fixes and posturing, some institutions and individuals see value in taking calculated risks. They recognize that the long-term benefits may outweigh the short-term costs (and fear) of tough decisions.

Debunking “The Economy Sucks”

In March of 2022, the Consumer Price Index, which measures the change in prices of goods, rose to a staggering 8.6%. Compared to the ~3.8% average year-over-year inflation of the past 60+ years, we weren’t doing too hot.

After revitalizing consumer spending through stimulus checks and low-interest rates, prices began to balloon, with alarms blaring that these increases were becoming uncontrollable.

The Fed had a tough decision to make.

Continue dismissing rising prices as “transitory” and hope that inflation wouldn’t rival our Latin American neighbors to the south or rapidly raise interest rates to halt inflation and potentially plunge the economy into a painful recession.

The easier, lower resistance route was to pray for the best. Maybe the price hikes were transitory and inflation would slow!

Instead, the Fed took a gamble—a big one.

In the months that ensued, Jerome Powell and his team raised interest rates eight consecutive times, the most extreme hikes in recent history.

Throughout, the Fed was under some serious heat. An article from Axios titled, “Why everyone was so wrong about the 2023 economy” highlights the negative financial and journalistic sentiment during 2022.

Everyone was betting against the Fed and the U.S. Economy.

Since 2022, even more interest rate hikes have ensued, but no recession has hit. Instead, unemployment is near its lowest point in decades, the S&P 500 is up more than 25% this year, and inflation has cooled to a low 3.14%.

While nobody has yet to proclaim a “soft landing”, you have to give the Fed some credit. They decided to take a calculated risk, push forward despite the naysayers, and (so far) have won.

I would be remiss not to mention that there have been some short-term repercussions.

We saw the collapse of several regional banks, housing costs are still through the roof, and the tech industry experienced mass layoffs.

However, many of these issues have stabilized or are improving. The chief economist of the National Association of Realtors, Lawrence Yun recently stated that “The housing recession is essentially over” and regional banking indexes are back to pre-SVB trading levels.

Using risk to our advantage is scary, but necessary.

In another part of the world, the newly elected president of Argentina, Javier Milei, is taking several of his own calculated gambles.

The 53-year-old economist has enacted a series of economic shocks to turn around the Argentinian economy that has been drowning in debt and inflation for decades.

Milei knows that the changes he is proposing are going to cause serious pain in the short term both economically and socially. Due to his devaluation of the currency, reductions to energy and transport subsidies, and other cutbacks, inflation has continued soaring and the Argentinian public is feeling it.

Yet, he (and the majority of the Argentinian population that voted for him) understands that for Argentina to grow its economy and improve its standard of living in the long run, it needs to take these calculated risks now.

When we avoid risky decisions in favor of what’s comfortable, we rob ourselves of what “could be”.

I believe that the worst gamble we can make is simply taking the path of least resistance and assuming everything will work itself out in the end.

Whether it’s on the micro stage of our own lives or the macro environment, we need to use risk to our advantage and take more calculated gambles.

You’ll never know where the outcome might take you if you never try.

-John Henry

Thanks for reading.

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