News

Why You Need a Margin of Error in Life Planning: How to Deal with Uncertainty and Randomness

When it comes to life planning, many people have thought about a question, if the current income is gone, how long can you maintain the current lifestyle?

Maybe three months, maybe three years, but we have overlooked an important issue.

In addition to being able to afford daily expenses and ensure that the quality of life does not decline, can you ensure that your mentality is always stable?

It is easy for us to plan a certain amount of savings and allow ourselves a period of income decline or even no income, but it is easy for us to ignore the psychological impact of income decline .

Your confidence and peace may be lost for a month, and your family may be constantly pushing you to change your plans.

An entrepreneur in “Money Psychology” said that data reports can accurately tell you the increase or decrease of assets, but they cannot reflect that you are entangled in your investment after you go home late at night and cover your sleeping children with quilts . Whether the decision was wrong and whether it will affect their mood in the future.

A comfortable and relaxed life requires a certain amount of room for error to support, that is, the room to allow yourself to make mistakes .

You will not be forced to change your lifestyle because of a small accident, nor will you be depressed because of the failure of an investment.

The greater your room for error, the more secure your sense of security will be.

Morgan Hauser, the author of “Money Psychology”, is a partner of an investment company and writes a column on a financial website at the same time. He concludes that most failed investments are due to over-belief in probability .

For example, if there are nine Aces of Hearts out of ten cards, the probability of being drawn is 90%, so people will bet more definitely on the Ace of Hearts. But a small probability event does not mean that it will not happen.

You still might not get the Ace of Hearts.

The same is true in life planning. We have a high probability of retiring at the age of 60, and the calculator will also tell you the approximate amount of pension, but we cannot avoid the occurrence of small probability events, such as being unemployed at the age of 50, and the family status is still You are not allowed to retire; there are even accidents that prevent you from working until the age of 60…

Economist Benjamin Graham reminds people that the world is not black and white – it’s either predictable or it’s all about luck. Pursuing a gray area where you can accept all possible outcomes is the wisest way forward.

This gray area is your fault tolerance space.

Harvard University psychologist Max Bazeman conducted an experiment. When analyzing other people’s house renovation plans, most people would judge that the actual cost would exceed the budget by 25% to 50%, but when faced with their own plans, People will judge that it will be done on time and within budget.

We think that we have more control over our own behavior, so we will allow room for error in other people’s expenses, but this is not the case, most people’s decoration will exceed the budget.

The nature of life is uncertainty and randomness, and the only way to deal with this reality is to maximize the difference between the probability of what is predicted and what may actually happen, while giving yourself the leeway to start all over again if the prediction is wrong.

Within your margin of error, you can afford a range of possible outcomes.

With this tolerance, you can wait long enough to increase the odds that a low-probability reward will happen to you.

The Battle of Stalingrad during World War II was the largest battle in history.

At the end of 1942, a tank regiment of the German army was stationed on the grass outside the city on standby.

When the German army was in a hurry on the front line and needed tank reinforcements, something that shocked everyone’s jaws happened: almost all the tanks were unable to move.

Engineers quickly discovered the problem. It turned out that during the weeks when the German army rested and stood by in the rear of the battlefield, voles got into the tanks and made their homes. They gnawed clean the insulation of the electrical system.

Historians marveled that the Germans had the most advanced equipment in the world at that time, but they were defeated by field mice on the battlefield.

The smartest tank designer never thought of being wary of voles. Such accidents also prove that we can plan for all the risks we can think of, but there are always some too incredible situations that we can’t think of, and the damage caused by these things , often much larger than we imagined.

In 2006, Warren Buffett announced that he was looking for an eventual successor. He says he needs someone who is “innately able to recognize and avoid significant risks, including those that have never been encountered before”.

What are the risks for a start-up company??

You may think of unexpected risks such as not being able to recruit suitable talents, encountering economic crisis, being defrauded by partners, natural disasters, etc., but the problems encountered by real companies are even more incredible.

The investment company where the author works has encountered it. In some companies, the water pipes burst, flooding the office and destroying the contents inside; some companies were attacked by thieves three times in a row; Complaints to the health department about other customers bringing dogs into the store; one of the founders of the company had a mental breakdown…

Everything will have an important impact on the future of a startup, but none of them can be predicted in advance.

It is impossible to completely avoid unknown risks. What people can do is to prevent the harm caused by these things, that is, to avoid that a function can only be realized through one thing.

For example, most critical systems on an aircraft have backups, and the backups themselves have backups. Modern jets have four backup power systems, can fly on just one engine, and can theoretically land if all engines fail…

In life, if the short-term expenses are all based on wages, and no savings are used to build a buffer space, once wages are stopped, life will collapse in an all-round way.

People often think that money should be saved for a specific purpose.

For example, saving money to buy a bag, a car, a house, or planning for a trip abroad, or planning for retirement, these are all predictable things.

Life is full of unforeseen or even incomprehensible things like “voles gnawing on wires” . Saving money may not be able to completely avoid this part of the risk, but with savings, there are more ways to solve problems, and the greater your room for error.

The most important part of every plan is to prepare for the situation that the plan cannot keep up with the changes. The author shared his experience.

He planned his money into a “dumbbell shape”, taking risks on one part and holding the other part conservatively, no matter how high the return expectation was, he would not be moved .

Shortly after Bill Gates founded Microsoft, he said that he “thought of an extremely conservative approach, which is to deposit enough money in the bank. In this way, even if the company has no source of income, we can still pay employees’ annual wages”.

Both Yu Minhong and Lei Jun also stated that the company must have a certain amount of funds in its account to be able to pay tuition refunds and employee salaries.

For the risky part, reduce the expected return.

For example, your income other than salary, including part-time jobs or income from financial management, is used for investment.

What is the expected earnings for the next six months? Don’t hold an overly idealistic mentality, thinking that your income will definitely rise, but it will be one-third lower than it is now.

This one-third gap is your buffer space, so that you will not be anxious immediately even if your income decreases. At the same time, with this one-third gap, it will encourage you to treat the money in your hand more carefully, save more, and build your own safety boundary.

Most things in life follow a solid rule of thumb: Anything that can go wrong, will go wrong someday.

For the future, be emotionally positive and optimistic, financially pessimistic, and prepare for the worst.

Because those who leave ample room for error are more likely to have the last laugh than those who lose their fortunes, quit the game, or have to invest more capital if they make a mistake.