Why the Risky Options Can Sometimes Be the Safest

Last week I shared some of my concerns with what I called high-variance professions. A high-variance profession is one where a lot of people fail and a few succeed. Think actors, entrepreneurs, musicians and athletes.

I explained why high-variance is generally a bad thing, in terms of life outcomes, although it’s certainly not an open-and-shut case.

Interestingly, this logic doesn’t hold for high-variance activities. That is, having a high-variance profession (where, in the end, few succeed) doesn’t necessarily mean a short-term activity or project which has low success odds is a bad idea.

Often the opposite is the case. Taking lots of small risks, when added up, may actually be a safer strategy than pursuing just one or two “safe” options.

When More Risk Can Actually Be Safer

Let’s play a game. I flip a coin, if it’s heads I’ll pay you $150, if it’s tails you lose $100. Is this a game you want to play?

Well, if we only play once, the answer is probably not. For most people losing $100 will hurt more than winning $150. If you’re not sure, try imagining the numbers were instead changed to $10,000 and $15,000. Still want to play?

This tendency in human nature is called loss aversion. We turn down gambles skewed in our favor, because we don’t like the idea of losing. (For a great book on this effect, and the inspiration for the coin-flip game, see Thinking, Fast and Slow)

Now however imagine that I allowed you to play the game as much as you want. In this case, you’d be foolish to reject my offer. Every coin toss puts you, on average, $25 ahead, and the chance of losing any money decreases as you play more.

Taking many “risky” decisions ends up adding to a fairly safe bet.

When considering a high-variance profession, the decision is much like the coin-flip game you can only play once. You may win, but there’s also a good chance you’ll lose.

However, high-variance activities are like the multiple coin-flip game. The more you play, the safer it becomes.

We Pay Too Much For Safety

In most areas of life, humans are risk-averse. Given the choice between one round of my coin-flip game or $25, most people would pick the twenty-five dollars.

Because of this tendency in human nature, the economy rewards people who can reduce risk. Insurance and extended warranties only exist because people are willing to pay extra to eliminate uncertainty.

In finance, this is called a risk premium. Stocks, on average, return more than bonds. This is because stocks are riskier, so in order to attract the same investment, they need to promise better returns. Not just better returns some of the time, but better returns, on average, including all possibilities.

There’s a similar analogy for opportunities in your life. Many people will pick the “safe” choices, where the outcome of their effort is consistent and predictable. But there’s a lot of competition for those opportunities, so the laws of supply and demand tend to make them somewhat less attractive. Risky opportunities are less picked-over, so they offer higher average value.

This isn’t universally true. Some truly risky opportunities look like safe ones, so they have lousy returns even though there is considerable risk. Racking up hundreds of thousands of dollars in student debt for a mediocre college degree is probably one of them.

In addition, some fairly safe options are rather unconventional, so they’re hardly considered. Investing a solid month to meet new people in your industry will almost certainly produce some interesting opportunities, but very few people do this.

However, smoothing it out, this rule still holds. Risky opportunities will probably have a better average return than safe ones because the safer ones are under heavier competition.

Life is a Multi-Toss Game

Most people are myopic. The idea of investing a couple months or even a couple years into a project which might fail is deeply unsettling to many people. But that’s because they’re operating under the assumption that they’re playing a one-toss game.

Life isn’t a one-toss game. Except for the rare decisions which you can really only make once or twice in your life, almost all projects and goals are multi-toss games.

Imagine taking on a one-year project and failing. Not in a catastrophic way that would ruin your future, but in a way that would be disappointing. I’d guess many people would shy away from considering something like that again in the future, even if, in retrospect, the opportunity looked promising.

The problem with this situation is that it is looking at the one-year project like a single coin toss. If you took on the game I made earlier and lost $100, you might be discouraged to try again. However, this is exactly the wrong decision when you can play multiple times.

You probably have room for at least 20 or 30 one-year projects in your life. Maybe only one or two of them work out spectacularly and a handful of other have moderate success, with the rest being a fizzle. But if these are the right kind of projects, that can still be incredibly rewarding.

What are Good Gambles to Make?

The preceding analysis makes an important assumption: that the average value of your project is positive. Gambles at a casino have slightly negative average values, which is why casinos can make so much money from you. They aren’t taking on risk, because they’re playing a lot of multi-toss games at your expense.

In life, picking the positive-average projects is hard. Even harder is assessing whether these projects are better than their lower variance alternatives. This may be true, in general, but it’s harder to tell for a single case.

The mistake I think, is to look too deep. Trying to figure out too much in advance which projects are winners and which are losers.

I’ve been writing for this blog for nearly seven years and I’ve written over a thousand articles. Yet, even today, I have little idea which of my posts will be successful. It’s a tempting illusion that we can predict in advance which opportunities are the most promising.

A better strategy is to feel out the best class of opportunities by trying out even smaller projects. You can do a dozen one-month projects before deciding which one-year projects are worth pursuing.

Shorter projects are probably less valuable than longer ones, once again because people are myopic and likely overcrowd the easy short-term wins. But because you get more tosses, you can get a hint as to whether an opportunity is risky-smart or risky-stupid faster.

This strategy of escalating commitments to risky projects spread over a lifetime may end up being a much safer option than just pursuing one or two “safe” pursuits. Even the safest of pursuits have some risk attached, so by flipping only one or two coins your whole life the game still looks a lot more like the one-toss version above than the multi-toss version. This means that the riskiest option, in the long-term, may be to play it safe.

  • Sam

    Amazing post, Scott. Really enjoyed the metaphor of life as a multi-toss game. And I feel you are spot on on the fact that most people will tend to crowd around the “safe” opportunities, where competition will be fierce and opportunities much lower. In this respect, taking risky enough opportunities will indeed almost always yield higher returns (from my own observations, in any case).

    Take the example of language education. Most people around the world these days crowd around the “safe” bet of English education (if English is not your first language), or another very common language such as Spanish, French, or Japanese. While learning a language always offers tremendous opportunities IMO, if another hundred million or billion people around you are learning the same language, you tend to somewhat lose your edge, to put it mildly.

    Therefore, if we use this simple example, why not take a bit “riskier” coin toss and learn a language that hardly nobody learns? Say, Somali, Burmese, Quechua, Mongolian, or something along these lines. Then you bring in some real value, and you vastly extend your opportunities at actually getting a job because you didn’t follow the crowd. If an employer is looking at somebody fluent in any of those languages, they won’t be spoiled with choice. I think I’ll write a blog post about this topic!

    The same goes for education. You mentioned the racking up of hundreds of thousands of dollars in student debt in exchange for a mediocre college degree, which is probably a very risky bet disguised as a “safe” one. In Asia, NOT going to university is considered abnormal, and most young adults go to university just because their peers are following in the same footsteps. These days it’s an increasingly risky proposition, because people simply can’t find jobs just by having a university degree with good grades and high TOEIC scores (which, only 10 or 20 years ago, would have been a sure way to a good, stable career).

    What do you think?

  • Nate Anglin

    I’m a calculated risk type of guy. I like having my data and if my odds are good, risk taking here I come ;-).

  • Nick Riebe

    Awesome post Scott! It was one of your many successes!


  • Jack

    This sounds too vague I think you need to give more examples. I am an art student. Your comment about mediocre college degree sounds about right. But I wonder what kind of small gambles I can take.

  • Eugene

    Great analogy

  • Andy

    I am older than Jack probably and I definitely see value here. The concept of 20 to 30 1 year risk projects is intriguing.

  • TD

    Wow this actually made sense to me. Try multiple short-term projects to gauge which projects if done for a longer term can lead to useful results. This is one of the best strategies I have heard for taking on new work. Even though, this strategy requires taking small risks repeatedly, by doing so it ensures that your average risk over your lifetime is reduced.

    I have to now come up with a sensible way to apply this. Thanks for this post.

  • Brian

    I sort of agree with your article, but take a few issues too:

    – Often you can’t explain people buying insurance with loss aversion. A lot of it is just that people aren’t able to accurately judge extreme probabilities. Not the same thing.

    – I think some of the examples you use don’t work. People not investing a month in meeting people in their industry has nothing to do with risk aversion. It’s just that it makes people uncomfortable and goes against their habits.

    – As far as entrepreneurship goes, if you can keep the cost low you may be right. But most often that’s not the case. How many attempts at building a company can you really take? Two? Three? Are you really going to be able to stand up again after that? (Admittedly, you may acquire skills that allow you to switch to a corporate career in the meantime so that will hedge your bet a bit.) Also, there is very good evidence that people make less money becoming entrepreneurs than they could have otherwise.

  • jayaprakash

    its a nice analysis man. As you said I was little hesitant and always played a safe bet till now. Will try your multi toss game and let you know about d results . Good day.

  • Rohit Gupta

    This is a nice extension of the previous article.
    In finance, they call it hedging probably!
    You’re right, we need to take risks in a smart manner. 30 minor risks are better than a huge multi-year risk.! Majority spend their lives in a safety net anyways.

  • Kim SJ

    If you don’t take risks with art, you’re a craftsman not an artist. 🙂

  • Harsh

    this is why people who are good at testing increase their odds of success without burning their fingers. Like Charlie Munger said, you an remove alot of risk in life by feeling for what works and when something works go all out for it.

  • nick

    Here’s an example from my personal life: My brother-in-law was an art student (film major). He worked his ass off, to make connections in his industry and projects to showcase his skills, submitted to film festivals etc. He’s never held a 9-5 job despite the nagging from his family (even as a teen he freelanced with painting and graphic design). He is now a successful director of short films and commercials, and currently is working on something he is only allowed to discuss as ‘feature length.’

    A friend of mine interned at ILM while in college for animation, got hired as a production assistant, ate a shit-ton of ramen, eventually ended up at Lucas Animation as a concept artist in a year or two. Had to live in shitty, bug infested hovels for a while but now he’s doin alright.

  • Scott Young


    1. I don’t doubt that people assess probability poorly, but that humans are loss averse (and that insurance is a perfect example of this) is well-documented.

    2. That’s exactly what I said. It’s an example of something which has high rewards even though it isn’t risky. It wasn’t meant to demonstrate risk aversion, but as a counterexample to show that risk premium isn’t a perfect concept.

    3. That wasn’t really my point, choosing to be an entrepreneur as a life choice is indeed a high-variance profession, so you need to consider it the way I considered it in last week’s article. One year projects and “risky” decisions are certainly not limited to being an entrepreneur–they can also include side projects: starting a blog, learning a new skill, writing a book, making an app, attending a conference, etc.


  • Brett Warner

    I think the trick here is learning to evaluate risks properly. Take the coin toss example at $15,000 and $10,000

    If you only have $10,000 in the bank you need to evaluate a lot more than just the dollar amount. You also need to evaluate any other opportunities that are available to you and their relative payouts. If every other opportunity for income requires that you maintain a bankroll, you shouldn’t play a game that could wipe that out with variance. Great poker players know this and don’t play a table without a large multiple of the big blind.

    Obviously life is more complicated than this though. When you’re playing with large sums of dollars you need to look at relative happiness. A drop from 10k(if that was all you had) to zero would probably reduce your happiness a hell of a lot more than a jump from 10-25k would increase it. For me, most goals, decisions, or gambles are weighed in units of happiness. Which is why I can justify playing a roulette for a few hours. Odds are I’ll walk away lighter than I started But winning money wasn’t the goal, spending a few hours enjoying myself was.

  • Gary

    Law of averages indeed.

  • Jim Stone

    Solid advice, Scott.

    It also follows that we should probably take the $150 coin flip option even if it’s only one toss. We should re-frame the opportunity as just one such offer in a life full of them.

    Of course that doesn’t hold for a bet of $15,000 if that money is all you have available to bootstrap your business. That might pose more of a quasi-existential threat at that point.

    Any bet that’s seen to have positive value and is relatively small should be taken, all else equal in terms of opportunity costs.

  • Jim Stone

    It also seems to follow that if you do choose a high variance profession, you had better fill your work days with high variance projects.

  • Émilie B


    To a great extent, your example of the multi-toss game is the same as the diversification of an investment portfolio. Let’s say I invest all of my retirement savings in shares of one big but well established and strong company from age 25 to 55 for example. The risk is actually considered higher than if I invested the same savings in shares of a moderately high number of smaller and riskier companies because as another example, chances are, not are businesses will have a slow down in their profitability at the same time and for the same length of time. Also if one business goes bankrupt, you don’t lose everything so the potential loss is smaller than if you put everything in the same place.
    That’s a simplified explanation of it but I think most people will get the point.

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  • Kamal

    Thank You. I am really looking to start my own firm. This will give me courage. Thanks for sharing

  • Kamal

    Thank You. I am really looking to start my own firm. This will give me courage. Thanks for sharing

  • Suze Xavier

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  • Suze Xavier

    I agree. You gotta take a leap of faith . I see a lot of my acquaintances slaving away at work despite knowing that it would be easier and smarter to delegate some of the wok to a VA. I feel that their doubts concerning considering a VA are unfounded. Here is why: http://personaloutsourcing.co/

  • I think this concept applies to entrepreneurship which is why I am a big fan of testing multiple low-cost business ideas. While entrepreneurship itself sounds “risky,” you can actually test hundreds of ideas with little to no monetary investment and radically increase the odds of finding a profitable idea. And ultimately creating another revenue stream besides your day job is far less risky than relying exclusively on your day job for your livelihood.

  • Harrison Alley

    I think this concept applies to entrepreneurship which is why I am a big fan of testing multiple low-cost business ideas. While entrepreneurship itself sounds “risky,” you can actually test hundreds of ideas with little to no monetary investment and radically increase the odds of finding a profitable idea. And ultimately creating another revenue stream besides your day job is far less risky than relying exclusively on your day job for your livelihood.