Imagine you’re a tribesman of a village in the distant past. Each time you go to the nearby forest, there’s a 1 in a 1,000 chance that you’ll die if a tree falls on you if you sleep under it. That doesn’t seem likely to concern you, right?
Well, consider the fact that you’ll be going into this forest at least 100 times a year for the next 30+ years. All of a sudden, the chances that you’ll die increase drastically almost to a guarantee if you don’t avoid sleeping under big trees.
This thought experiment is an actual life scenario that y tribespeople of New Guinea still have to face every day. I discovered this situation in a book called The World Until Yesterday by Jared Diamond. He’s popular author behind the history classic Guns, Germs, and Steel (affiliate link). The tribesmen urged Jared to avoid sleeping under a tree. He had a hard time understanding the danger until they explained the math.
Jared had spent his life studying the people of New Guinea and similar tribes across the world. He detailed his findings in this book, and I read it because most of human history was lived in these hunter-gatherer conditions, and our genes and irrational emotional behaviors are still rooted in these times. By better understanding why tribes people function how they do, I can help you interact with modern humans better, control yourself better, and live a good life.
In the book, Jared discovered a concept called constructive paranoia that he observed tribes people use in various ways to survive. To modern humans, this paranoia may seem ridiculous. But to the local tribesmen, paranoia is perfectly rational because even if it doesn’t happen often, if it does happen and can result in massive consequences, like death. This paranoia can be about small things like when you hear a rustle of leaves because it can be a tiger that is about to eat you, or chatting for two hours a day with other people about gossip, news, and the weather to stay up to date on any important developments. Maybe 999 times, it’s just the wind or another non-issue, but the one time you’re not vigilant, you’re dead.
Constructive paranoia can still be used effectively in the modern world. He has met many people who have learned the hard way since their jobs have large consequences to failure. These people operate as an airplane pilot, army soldiers or taxi driver, professions where they’ve seen others die or pay a lot of money from not double or triple checking certain things.
I have personally used constructive paranoia while driving my car. Some people will honk their horns at me for only driving 5 miles over the speed limit or not being aggressive enough, but that’s fine. I’ve never seen people act more small minded and shortsighted than on the road. They’re willing to risk their lives just to shave a few seconds of their time only to go home to waste hours watching TV. They will bear the costs in terms of injuries, accidents, insurance costs, repair costs and even death.
I want to look for other ways of using constructive paranoia, so leave a comment if you can think of any. Another situation is any form of prevention. The main cause of death for Americans is heart disease and car accidents, so I’m also trying to eat healthier and prevent heart attacks. In fact, heart attacks cause 100 times more deaths than terrorist attacks, so McDonald’s and Chick Fil A should be treated with more fear than terrorists, but the average American doesn’t see it this way because they don’t look at statistics.
“In 2012 about 56 million people died throughout the world; 620,000 of them died due to human violence (war killed 120,000 people, and crime killed another 500,000). In contrast, 800,000 committed suicide, and 1.5 million died of diabetes. Sugar is now more dangerous than gunpowder.” -Yuval Noah Harari, Homo Deus
Another area I’ve noticed as an application of constructive paranoia in the modern world is Warren Buffett’s aversion to catastrophic results in investing. He has a saying that goes “if he had a gun with a thousand barrels and only one bullet in one of the barrels and someone told him that he would win millions of dollars if he pulled the trigger once, he would never do it.”
The analogy is to illustrate that he wouldn’t take investment decisions with tiny risk that give him a lot of moneyif it had a chance of wiping out everything he’s worked to accomplish even if it means missing out on some extra return on investment.
After studying his life intensely, I believe it makes perfect sense. Most people are greedy and they’ll take that risk for extra money they don’t need. Especially from a branding perspective, it can take decades to build reputation and you can lose in the second.
Warren has come across many investors during his life who took on too much debt and too much risk and lost it all, never fully recovering. The greatest example is of the firm Long Term Capital, which had a team of the highest IQ people in the world and consisted of Ivy League graduates.
Warren also says a catastrophic nuclear terrorist event is inevitable. If there’s a 1% it will happen every year, when you live enough years, it’s almost guaranteed after a while. Hence, part of the process is understanding an ounce of prevention is worth a cubic ton of cure, but part of success is preparing for disaster when you know it’ll happen. What’s the recovery process when it does happen? Unfortunately, our government doesn’t really have one right now.
People are too focused on how much money they can make so much so that they give zero effort to protecting any downside. A small illegal activity leads to a lawsuit, a misjudgement in a huge hiring decision leads to a huge loss in reputation, and so on…
Nobel Prize winner on behavior economics Daniel Kahneman discovered through his experiments that humans overweight and overvalue the chances a small, low risk, high catastrophic event happens. So you don’t have devote too many resources to accounting for this event, but you don’t want to devote zero resources to it.
After listening to Richard Branson’s stories through his books, I can tell that although he doesn’t like lawsuits, he has learned to stand his ground and expect them. More importantly, he’s learned to not let people mistreat him by suing him on false claims just to get money.
Richard’s advice on lawsuits in a nutshell (based on his book The Virgin Way): trust your gut. if something is amiss, keep at it. if something is fishy or not-legitimate, you can sue them back.
I think Martha Stewart gives the best advice on how to deal with lawsuits as a business owner. She’s one of the lesser known billionaires and wrote a spectacular book on success. In it, there’s a great chapter on dealing with bankruptcies. The biggest thing I got out of it was the sense of calm and understanding that bad stuff happens to everybody and to be ok with that. She got through it despite tons of negative media attention and it tarnishing her reputation.
Mohnish Pabrai, an investor, said something very insightful about the billionaire Warren Buffett’s style of investing and life: “even as a kid, he was very careful. He would walk in a weird way to be very careful to not fall.”
In fact, Pabrai’s whole book The Dhandho Investor is all about protecting the downside. The essential theme of the book is “heads I win and tails I don’t lose that much”. What this essentially means is find investments and deals where you don’t lose much money if it all goes horribly in a worse case situation.
So, once I had negotiated the price for a second hand 747 from Boeing, I said to them that if Virgin Atlantic wasn’t successful, then I wanted to be able to hand the plane back at the end of the first year — therefore protecting the downside. It was the most difficult thing to negotiate, as Boeing wanted to be sure that the plane was off their balance sheet and a successful sale. Fortunately for me planes weren’t selling all that well. They decided they would take a risk with me as they wanted a competitor to British Airways in the UK, so BA couldn’t hold them to ransom every time they negotiated on a plane.
When I sat down with the directors at Records, I was able to say at the absolute worst we would lose six months’ worth of profits. But if it went well, we would then be able to buy a second and third plane, build another successful business and something we could be really proud of. Because I had the downside protected, they could see the logic of my decision. While they didn’t welcome it with open arms, they gave me their blessing. -Richard Branson
There’s a big misconception that successful entrepreneurs take massive risks that could wipe them out. As you can see, Richard Branson, assumed by many to be this wild, risk-taking billionaire, actually makes rational decisions to always protect the downside.
I think a focus on the wrong things and the wrong motivators spells doom because it makes people not focus on what’s truly important: taking care of your customers, creating something amazing, and so on. Arrogance, greed, and other motives that are behind the pursuit of wealth (sex, fame, etc.), can divert attention and push you in the wrong direction.
Here’s some more input on the topic. Watch the video starting around 14:30
“8 out of 10 businessses do go bust and it’s because they don’t think about the downside consequences. Without being too conservative, think about what’s the worst that can happen.” -Richard Branson
He makes a point that someone who does not do this is approaching it as just gambling, which he frowns upon. His point is directly in line with Warren Buffett’s which is that you should play business like you are gambling. Protect the downside because you can lose it all.
If you lose 50% of your assets, you have to increase your gains by 200% just to get back to where you are.
Mr. Buffett used to be in a 3-person investing team. One of the team members was Charlie Munger, which we all know is still Buffett’s partner. Where is the 3rd member now? According to an account by the investor Mohnish Pabrai when he asked Buffett, decades ago, this man got greedy and leveraged tons of debt. Unlike Munger and Buffett, he was impatient to get rich. One year, the numbers went against how he wanted them to and he took hefty losses.
A great example is the company Long Term Capital, which was made up of the smartest Ivy League graduates in the world. Buffett passed on investing in Long Term Capital and people called him a fool. The firm made monumental investment gains year after year. And the markets eventually revealed the real fools. LTC got greedy and risked too much and lost it all. Their risky behaviors almost crashed the world economy since they used tons of debt and relied on something that had a very low chance of happening from not happening.
How will you use constructive paranoia to succeed?
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