I recently read what 92-year-old, legendary mathematician and hedge fund manager Ed Thorp had to say on longevity (via Nithin Kamath on X):
I particularly found the part on what Ed calls “defense” highly intriguing – he says: “It just takes one weak link to finish you off”. Essentially, my understanding is that among other things, defense involves avoiding a bunch of things that when done repeatedly, could essentially wipe you out (as in, you die!).
Ed gives the example of “a terrible skiing accident” but other things that come to mind include say helicopter rides, binge drinking, bungee jumping, living next to a dangerous turn on a busy street etc. While the probability of death in a one-off instance of these games might be low, when done repeatedly, the chance of death becomes non-trivial due to repeated exposure.
Nassim Nicholas Taleb calls this concept Risk of Ruin, and I remember getting blown away when I read about it for the first time in his books ‘Skin in the Game‘ and ‘Antifragile‘. So much so that Ruin has become an essential mental model in my toolkit both personally and as an investor.
In particular, I love 2 specific examples of Ruin that Taleb frequently cites:
- The Casino Experiment – let’s say we know that 1% of all gamblers playing at the Casino win. So for every batch of 100 gamblers that visit the Casino daily for 100 consecutive days, we know that each day, 99 will be wiped out and 1 will walk away with money. Now take a different case – one gambler visits the Casino daily for 100 consecutive days. In this case, his probability of getting wiped out at some point is 100%.
- Russian Roulette (quoting Taleb directly here) – “Assume a collection of people play Russian Roulette a single time for a million dollars –this is the central story in Fooled by Randomness. About five out of six will make money. If someone used a standard cost-benefit analysis, he would have claimed that one has 83.33% chance of gains, for an “expected” average return per shot of $833,333. But if you played Russian roulette more than once, you are deemed to end up in the cemetery. Your expected return is … not computable”.
Taleb calls the former case where different groups do an activity, and probabilities and expected values are computed “in average”, as Ensemble Probability whereas the latter case of a single person repeatedly doing an activity across time as Time Probability.
As common sense would tell us, Ensemble Probability represents a mathematically driven, academic (almost artificial?) scenario analysis, whereas Time Probability represents how we as individuals get exposed to risk in real life.
Time Probability suggests that there is an underlying Risk of Ruin in many more things & activities in real life than our brains can cognitively appreciate in the thick of the action.
Over the years, as I have read/ listened to more thinkers across fields, many of them highlight this same concept of avoiding Ruin in their own words. Examples include:
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. – Charlier Munger
Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average. – Howard Marks
The 1st rule of investment is don’t lose money. And the 2nd rule of investment is, don’t forget the 1st rule. – Warren Buffett
[Paraphrasing] “Arithmetic returns are false hopes; the truth lies in geometric returns” / “Profit is finite. Risk is infinite”. – Mark Spitznagel
Essentially, all these quotes are pointing to the same underlying idea:
The most important force that governs life, be it in health, relationships or portfolios, is compounding.
Given its cumulative nature, the optimal strategy for enabling the magic of compounding is combining avoidance of ‘Ruin’ (going to zero/ total destruction) with ensuring ‘Survival’ over a long enough period of time.
Audio Overview of this post (via NotebookLM):