How to distribute risk to set you up for success
The barbel strategy was presented by Nassim Taleb in Antifragile as a tool for asymmetric investing. Its main purpose is to limit risk for the investor, and thus provide some rest and ease.
And it seems to work just as well for other areas of life than investments.
The strategy outlined
Imagine having a barbell. They’re usually equally weighted on both sides, giving the person who’s using them an equal weight distributed across both arms and the chest.
If we put the barbell down, and redistribute the weights so that they’re not at all equal anymore, we get a completely different tool. Looking at it from the side, having a majority of the weights to the left and just a few to the right, we have a good starting point for the picture.
Now imagine the barbell being a scale of risk, going from low risk to the left and high risk to the right. We have a vast majority put in safe and sound relative risk-free area, and some in the very high risk area.
It gives us an opportunity to see risk in a new light, and adjust in relation to it. We can structure our activity, whether investing exercising or doing business, so that we’re safer from the high risk behaviours.
We use it because the high risk behaviours are usually high reward as well. You probably need a lot of stability and security, but it’s nice to know that there’s a possibility for an activity to become unbelievably asymmetric, which rarely happens without risk.
That’s what the barbell is, what it means and how it’s used in the metaphor.
Different kinds of risk
With investments, the risk you’re taking is with money. The higher risk, the higher the risk to loose some or all of it is.
That being said, there are many more cases where there’s risk. In social contexts, there might be risks of being humiliated. When exercising, there’s a risk of getting injured. And so on. When working, there’s a risk of you getting fired.
The consequences are always going to be hard to predict, but you probably have a range of that too. When running, you probably have a range going from sore legs the day after to massive surgery, depending on what exercising you’re doing.
Risk is both moving on that range, as well as lowering the odds for it happening.
If I’m playing soccer, the risk is immediately higher than if I’m running. I can contract other injuries, just as well as the probability for me doing so is a lot higher.
The solution
What we’re going to do is to use the analogy of the barbell and identify what we can do in order to limit the risk we’re taking.
In most areas of life, we can do both the low and the high risk activities at the same time. We can both exercise by running and play soccer in the same week. It’s a question of attention and volume.
A brilliant example is people starting side hustles or business at the side fo their full time job. That is truly using the barbell being put to use.
The safest thing most of us know is to have a job at a big company. It provides a steady income every month and possibly some benefits as well. On the contrary, starting a business of your own is a high risk-high reward game.
Using the barbell, you’d distribute your time and money across the bar. Say that you commit to using 10 hours every week to the side hustle as well $200 from your salary every month to get it going. You’ll be safe in having your job, but the business could explode in to something very big.
The same goes for exercise. You run 5 days a week, and play a game of soccer every weekend. In that case, you’re probably lowering the risk for an injury as well, as you’re preparing your body.
This gives us two things.
The mental rest of knowing that you’re safe. You’re hard wired not to take risks that put you in any kind of danger. And you’re interpreting all kinds of modern activities as putting yourself in life threatening risk.
The opportunity for asymmetry. Most safe things are symmetric. Do something and you’ll get the same result, or almost the same result every time. Go to work every day for a month, get your salary. Work for yourself every day for a month and you might make a years salary in a month.
Conclusion
The barbell strategy offers some food for thought on how we handle risk in everyday life. It’s incredibly useful when applied properly, giving you all kinds of leverage towards asymmetry as well as security.
What I’ve found using it myself and with my clients is that it’s most useful when drawn out. It’s also really important to identify the risks that you’re seeing, so that you can address them within the barbell to find solutions.
Do a follow-up every now and then. Risk, as well as life, is dynamic. Sometimes we need to readjust both our goals and our approach to them. It’s healthy to come back to the same barbells every now and then.
Lastly, don’t put everything in to this model. It would be counterproductive as well as against all reason behind the model itself. Do what works for you first, and try adding this model to your repertoire as you go along. Experiment with it.
