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Personal Finance FAQ

Risk: It’s Not Just a Board Game

Risk
I always go for Australia.

“The fear of death is the most unjustified of all fears, for there’s no risk of accident for someone who’s dead.”
–Albert Einstein

When I was a kid, I used to read Choose Your Own Adventure books. For those of you who are unfamiliar with the genre, you were the main character in a story. The first few pages were an initial vignette, and then you had to make a decision. If, for example, you went into the cave, you’d turn to page 33, but if you went to the lagoon, you’d go to page 52.

Occasionally, these choices spelled doom and gloom for your hero character. You’d step into a pit of monsters and that would be the end.

Except, of course, you could always go back to the previous spot and make a different decision.

Life rarely offers these opportunities to turn the page back and make different decisions. Once we’ve chosen, we’re forced to live with the consequences of our actions.

Most of the time, bad outcomes from our decisions aren’t truly that bad. We go to a restaurant where the waiter was surly. We buy cable packages with channels we never watch. The TripAdvisor reviews about the hotel we chose for our vacation were overly flattering.

Those are inconvenient outcomes, but we can shrug them off and move on with our lives.

Some outcomes, though, aren’t as easy to move on from.

Therefore, when we’re faced with risk and potential bad outcomes, we have three choices for how to deal with that risk:

  • Reduce the risk. Driving around on bald tires? Change the tires and reduce the risk of a blowout on the Interstate.
  • Accept the risk. Each time you step on a plane, you’re taking a risk that the plane is going to fall out of the sky. The chances are very low (though our limbic systems tell us that the risks are much higher), and it’s not like you can fly the plane better than the pilot, so you accept the risk and take that flight.
  • Insure the risk. When a bad outcome would be devastating to you or your family, you can pay someone else a small amount of money to pay up in the event that the bad outcome happens. It’s why we have health insurance, life insurance, auto insurance, homeowners’ insurance, long-term care insurance, and disability insurance.

As a financial planner, one of my primary goals is to make sure that you’re protected against bad outcomes. One of the biggest mistakes I see people make is accepting risks they should be insured against and insuring risks that they should be accepting.

For example, few people come to me with an adequate disability insurance policy in place. If you’re young, then one of the biggest risks you face is the inability to work, as it’s your income that provides the foundation for you to build a retirement nest egg. Yet, when we’re young, we think we’re Superman or Superwoman and will never get sick or injured. Those who do, though, rue not having adequate protection.

On the flip side, people insure against risks which don’t really need insurance. They buy whole life insurance for their infants. They buy cancer riders on their life insurance policies (if your insurance agent tries to sell you cancer insurance, fire him). Agents who sell these policies play on your emotions and fears. Parents of newborns are scared about losing that bundle of joy. I’m scared to even hold infants lest I damage them! Most of us, somewhere deep down in our brains, have an irrational fear of dying of cancer. In 2018, 609,640 people died of cancer in the United States, which, while a huge number, is only about 20% of the overall death rate in our country.

Insurance and risk management is an enormously important topic, so that’s why I’ve volunteered to host the 195th Cavalcade of Risk.

What made the cut?

Want to read more about my thoughts on insurance and risk? Check out some of these articles:

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

3 replies on “Risk: It’s Not Just a Board Game”

Jason, I have long term disability coverage (after 90 days of disability) through my employer at no additional out of pocket cost (though the benefits will be taxable if it comes to that). No short term coverage (though it is available). Matt Becker recommended I purchase on my own, something that isn’t tied to my employer…but despite his advice I still think I should only go down that road once I lose/change my employment. What are your thoughts?

Oh, and I prefer South America (or North, if I feel bold).

Hey, I’d love to provide specific advice, but I can’t do that without being under contract. My professional liability insurance won’t let me provide specific recommendations to people unless they’re clients. Sorry.

North America? You are a bold thinker! You probably either win big or get wiped off the board quickly, if I had to guess. I should try to find a FOSS computer version of Risk. Then again, I’d never see the light of day. I’m on the computer too much as it is!

Understood on the advice. No worries.

My simple math says that North America provides a good payoff (5 extra dudes each turn for a continent that needs to be guarded with 3 armies). Australia has the best payoff (2 extra dudes for a continent guarded with 1 army) but I will openly and unabashedly try to convince all other players to punish the person who goes after Australia early, by picking off the countries he/she has one army in. The key is not to let them plop their huge bonus armies into continents of value (South America, Africa, North America) and try to isolate them in the South Pacific.

This usually does not work, as self interest takes over. Stupid Monkey Brain.

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