Sunday, January 08, 2017

Routine or Catastrophic

Risks can be routine, and they can be catastrophic. 

You can drop your phone. Spill wine on the carpet. Burn dinner. Puncture a tire. Miss a flight. Lose your wallet. There are various things that suck, but if you aren't living on the edge, you can deal with. Like shock absorbers on a car, a buffer can allow you to drive smoothly over the little knocks we face. A buffer can let you plan ahead.

Catastrophic risks will wipe you out. A buffer is not enough. Most people's biggest asset is not their house or car, it is their ability to earn an income. If something goes wrong and you can't work, that is a huge problem. A buffer just helps you smooth out the bumps till things recover. A buffer is no good if you take the road away. Poverty is another catastrophic risk. If you are born with no buffer of parental or societal support, routine risks for others can become catastrophic for you. The road being taken away is a taste of the road never being there to begin with.

Routine risks are things we should try deal with ourselves. 'Moral Hazard' means, being human, we change our behaviour if bad things don't hurt at least a little. Some concern keeps us sharp. Helps us take responsibility. A buffer works better than insurance. Buffers aren't just financial. You can have a couple months salary in cash in the bank for curve ball expenses, but some of life's bumps require relationships. A strong community spreads the hurt a little keeping people sharp as a team.

Insurance comes into its own with Catastrophic risks. The law of large numbers means that things that are hard to predict for one individual become easier to predict for very large groups. Sharing risk for something completely out of your control, that could destroy everything you work for, makes us joint custodians. A big, unlikely game-ender, becomes small and manageable.

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