While I’m talking about money not being the measure…
It’s worth bringing attention to a thought-provoking article by Cathy O’Neil titled “The basic unit is risk“.
O’Neil shares a “pet theory”, arguing that:
speaking in terms of wealth is a mistake. We should instead speak in terms of risk. It’s a different unit, and it’s harder to quantify, but I think risk is what we actually care about. I claim it’s more basic than money.
For example, why are we afraid of not having money? It’s because we run the risk of not having resources to eat, sleep, or get medicine or treatment when we’re sick. If we didn’t have fears about this stuff then people would have a very different relationship to money. The underlying issue is the risk, not the money.
Financial markets putatively push around money, but I’d argue that why they exist and how they actually function is as a way to spread around risk. That’s why the futures market was developed, for farmers to have less risk, and that’s why the credit default swap market was created, to put a price on risk and sell it to people who think they can handle it.
It’s a fascinating theory! And she makes an interesting suggestion:
next time you hear of a plan by politicians or regulators or Wall Street bankers, think not about where the money is flowing but where the risk is flowing.
A perfect example is when you hear bankers say they “paid back all the bailout”; perhaps, but note that the risk went to the taxpayers and is firmly fixed here with us. We haven’t given the risk back to the banks, and there doesn’t seem to be a plan afoot to do so.
At a personal level, I think this is highly relevant. I grew up very modestly. As an adult, I find myself nearer the other end of the spectrum. It’s a very different experience. But I wouldn’t say it’s different because of the things I can buy or the things I spend my time doing. It’s different because I can get things wrong.
This blog is made possible by Fairhaven Wealth, my independent, fixed-fee, advice-only financial planning business.
I don’t have to spend my time optimising every single thing in my life, in the knowledge that if I waste $100 it will have a significant impact on my lifestyle and on whether I can buy school stationery for my children next week. I’m way more relaxed, and I have more emotional and cognitive bandwidth to focus on the things that really interest me.
This is a function of having money, but it’s more than that. It’s a function of other factors, such as having a supportive family and social structure. It’s a function of having skills, knowledge, and contacts, which enable me to take risks with my career. It’s a function of having an understanding of how Government works, and the confidence that I can navigate the bureaucracy to get the services I’d be entitled to if I needed them. It’s a function of having a broader perspective and understanding that life is inherently uncertain and it’s better to embrace this than deny it.