Barbell strategy decision making heuristic

When making an important, potentially life changing choice where some of the options may be irreversible, it is important to thoroughly analyze the different options before choosing one. But it is impossible to weigh options against each other if you don’t have objective criteria against which they can be measured.

I will propose here that because of the uncertainty in future prediction, and the existence of so called positive and negative “black swans” (unexpected, impossible to predict, high consequence events), the best strategy is the “barbell” strategy.

In the context of this post, a barbell strategy means that you choose the option which, given high volatility, the worst possible outcome (worst case) of your choice is acceptable, and most optionality.

(To understand the reasoning behind this and why optionality is good, it is probably best to read the thought-provocing book Antifragile by Nassim Nicholas Taleb.)

Thus, the decision making criteria against which you will measure your options will be as follows:

Which choice brings an acceptable worst case, while maximizing optionality?

Note that we are not looking for the BEST worst case, instead we are disqualifying all options which have non-acceptable worst case scenarios.

Out of the remaining, we are choosing the one which gives us most optionality.

What is optionality in the context of decision making?

Optionality can be defined as:

The ability to discover and take advantage of unexpected opportunities.

Notice that this is two pronged: discover and take advantage of. In general, in order to be able to take advantage of any opportunities, you have to control your own time.

In general, all of us have more or less control over our own time as defined by the below parameters:

• The amount of free time we have
• The amount of flexible time we have

In order to survive, we all have to fulfill a baseline living standard (at least food and shelter), which translates to a baseline income stream. This is non-free time, and the rest is free time. How much free time we have, then, is defined by how much of our time needs to be tied up to income-generating activies. (Notice that I say “needs to be tied up to” and not “is tied up to” – because if you tie up more of your time than necessary on such activities, that is a choice, thus defined as you choosing to spend your free time on income-generating activities rather than other activities.)

How much of our time needs to be tied up to income-generating activities is defined by the following factors:

• The amount of money you already have “in the bank” which you can spend on both living and on opportunities before it “dries up”
• How much time it costs you to get income (income is very cheap in terms of time if you have a passive income flow or if someone is simply handing you money for free, otherwise it is determined by your hourly rate – actual or calculated based on salary vs. time spent on job)
• Your “happiness cost” of actual cost of living (meaning can you live really cheaply and still be happy, or do you need luxury roof over your head, food, activities in order to be happy?)

Based on all this, an example of a lifestyle which brings incredible amount of optionality would be as follows:

You live alone (don’t have to support anyone) in a house you fully own with no rent, you eat very cheap food with no demands, you meet a lot of interesting people through various online groups, and you have both a passive income stream exceeding your living standard plus a lot of money in the bank which you can spend on any opportunity you wish.

An example of a lifestyle with a very low degree of optionality (which unfortunately, as far as I can see most people in the western world seem to live under), is as follows:

High mortgage with borrowed money and bad housing market (basically already at this pointyour optionality is gone since you cannot get out of having to pay a certain amount of money per month in mortgage, forcing you to spend all your time on activities which bring immediate income, with no ability to focus your efforts on longer-term opportunities regardless of how good those opportunities may be), a large family with a luxurious (expensive) lifestyle to support, no money in the bank (or less money than debts even after including the value of your assets that you could potentially sell), a job that demands all your free time (even after minimizing the amount of sleep and family time you get – because now you can’t even spend your time on potential opportunities, even if you had the money to do it), and meeting only the same closed group circle of people (you meet only them, and they meet only you and each other – no outside influence) that you meet through your work and family every day – and, in addition to that, when meeting them you only have time and energy to talk about short-term work related issues rather than potential long-term opportunities (long term opportunities can be translated as simply “enjoying yourselves” and talking about ideas, things you have seen, gossiping, and philosophizing, since those activities are what breed ideas, and ideas are in fact long-term opportunities).

Note that in such a situation, regardless of whether you have superhuman intelligence, abilities, control over yourself, multitasking ability, and experience – there is simply no way that you can get out of that situation unless you do one of the following:

• Being lucky and stumbling upon a more passive or higher income stream (since you can’t search for such income streams, you rely do have to rely on luck – luck such as someone randomly approaching you on the street and offering you a job, or you overhearing a conversation which prompts you to ask for a potential new job)
• Reducing your living costs (most likely by reducing your lifestyle requirements, which though is very difficult considering you have a family to support – something you should have thought about before getting children), which will enable you to reduce your working hours by taking a new job

What is an acceptable worst case scenario when making decisions?

An acceptable worst case is:

Any option which is reversible (meaning even in the worst case, with the amount of time and/or money at your disposal before you die or loose your freedom permanently, you can return back to any of the previous good points you have been at from a free and flexible time at your disposal point of view, at an acceptable level of happiness)

With that worst case locked in, choose the option that brings most optionality. Optionality means that you can make many small bets, hoping that one of the bets will pay off big time (for example invest in businesses or stocks, starting companies, meeting a lot of people which can show new opportunities, etc.)

Some practical implications of this decision making heuristic

• Education raises your worst case. With a degree, you always have a good chance to go off and take a lot of risky bets, but you can always change your mind and go back to a reasonably well paying job (assuming your degree doesn’t deteriorate when you don’t entertain it)
• Taking rare, well paying jobs that forces you to work a lot are two-pronged: On one hand, they lock you into a rich lifestyle and reduces your possible worst case options – because if you try any other option, you will not likely be able to get back to your current situation. On the other hand, you can use these jobs as temporary platforms for saving money, which doesn’t put you in a situation which you can’t go back to easily as you haven’t really raised your living standards, plus having a lot of money in the bank is in itself an improvement of your worst case (the more money you have, the more flexibility you have in avoiding potentially irreversible situations).
• The poorer you are able to live happily, the better your optionality is. Because whatever you do, you can’t do worse than you are doing today, but you have enormous upside. Basically, the poorer you are, the more free you are to use your time on anything you want (however, not having money in itself can be a limitation, as you may then not have access to tools, resources, geography that would give you optionality – so this is a tricky balancing act).