Risk Parenting 101: 7 Key Principles to Teach Your Kids about Risk

In my world, predictability and certainty are myths. Challenging assumptions, no matter how fundamental, is my life motto. But how do I explain this to other people and, most importantly, my children? In this article, I attempt to share my own principles for making better decisions amid life’s chaos. These ideas are not just about survival; they’re a radical blueprint for turning uncertainty management into a superpower.

Principle 1: Chaos Brings Optionality

Forget what you know about life predictability. Life is a wild collection of millions of interconnected random events. Most things in life are random, no matter how hard we want to believe in destiny. In fact, the level of randomness in our lives is unfathomable for the human brain to comprehend.

Embrace this beautiful chaos, not with fear, but with the excitement of a challenger ready for the optionality that the future holds. Don’t fall into the trap of thinking of exact steps you or someone else will take or say, view the future in broad strokes and don’t feel bad when events take a different route from your preferred option.

My favorite saying in English is, “The future is plural.” Think of life not as a single scenario but as a collection of plausible scenarios, and a range of possible outcomes. Structure your life in a way that allows you to take advantage of whatever the future brings. Think of life like a game of cards; you can’t predict the next card, but you can learn to play well with the cards you’re dealt and you can learn to know that some cards are more likely than others.

Principle 2: Diversify Everything; MVP Everything

No one really knows for sure what will work and what won’t in a given situation. Life is about experimenting and trying different things to see what works best. And the most important part of experimenting is hedging your bets in case the first experiment doesn’t work.

Try different things in parallel, test different hypotheses, and put many small eggs in different baskets. Diversify industries, locations, and countries. Don’t buy one big house; buy 2 apartments in different countries instead and invest the rest in the market.

Then, no matter what happens, and even if some ideas or projects fail and you lose some money, you will still avoid ruin. Avoiding ruin is one of the most important rules in life. Just keep in mind that when things go really bad, few countries and industries stay uncorrelated and continue to provide the positive effect of diversification.

Another key idea is to quickly test different options. MVP everything. Build quick, high-level minimum viable products/prototypes to see if the idea even works. You would save an amazing amount of time. Fail quickly, and don’t waste time on ideas that don’t deliver.

It’s like planting different types of seeds in your garden; not all will grow, but you increase your chances of having something bloom. And don’t forget to have different gardens in different locations.

Principle 3: Learn to Recognize Biases

Biases are everywhere; they affect how we think and how people around us think, interpret information, and interact with us. Learn to recognize biases in yourself and others. Recognizing biases in others is much more fun, of course.

Follow these simple rules:

• Don’t make important decisions when hungry or tired.
• Don’t say out loud the first thing that comes to your mind; it is most likely system 1.
• Never make important decisions on the spot. Sleep on it, put some distance between the decision and now.
• Your initial perceptions are most of the time wrong.
• When emotions are high, system 2 switches off. You can think bad things when angry but never take action.
• Never make big decisions by yourself. Talk to different people when you’re unsure. Getting different viewpoints is like looking at a map before starting a journey; it helps you see the bigger picture, avoid biases and different paths.
• Remember, our brains often take shortcuts in thinking, like jumping to conclusions too quickly. Always question if there’s another side to the story. And always challenge and question assumptions. You would be surprised how unscientific many things in life that we take for granted are.

Principle 4: Think 3 steps ahead and in ranges

Thinking three steps ahead is a great way to force your brain to overcome some of the biases. Whenever you need to make an important decision, think of the consequences of that decision. And then think of the consequences of those consequences and their long-term effect. Seeing the third step ahead often changes the decision quite significantly. This isn’t just planning; it’s a form of time travel.

Another great tip is to always keep in mind the end game. Whenever making choices, keep in mind the ultimate objective or what you are trying to achieve at the end of the day. A lot of choices that we think are important actually make no difference to the end game and so you shouldn’t spend too much time on them. Some things just don’t matter because they equally contribute to the end game.

Think in ranges instead of specific values. How long will this take? 20 to 30 minutes. When will you finish? 2 to 3 weeks. Learn to appreciate and communicate uncertainty by thinking and talking in ranges. Nothing in life is certain.

When you make a choice, imagine it as a row of dominoes. If you knock the first one down, what will happen to the others? Always remember, making a decision is not about finding the perfect answer; it’s about making the best choice with what you know right now.

Principle 5: Beware of Leverage

Avoiding ruin is one of the end games for us. And nothing increases the probability of ruin more than leverage. Leverage only what you are prepared for and can afford to lose. Using other people’s money is risky and you really need to know what you are doing. And even when you think you know what you are doing still have enough stop losses to protect from total ruin.

Using leverage is like borrowing a friend’s new toy; it can be fun, but if it breaks, you’re the one who has to fix it or replace it.

Principle 6: Don’t Be Afraid of Sunk Costs

We often limit our own potential by artificially staying within the bounds we ourselves created. Don’t be afraid to let go and start from scratch. Don’t just reuse old materials; only use bits that still make sense and help you reach the end game. Every time I answer the same question, my answer is different because it has evolved over time.

Don’t be afraid to completely change your views if there is enough evidence to suggest you were wrong in the past, or if the world has changed and the previous solution no longer makes sense. Don’t just copy and paste the old; always look for new, better ways of achieving the end game and making decisions.

If you’re holding onto something just because you’ve spent a lot of time on it, remember it’s like holding onto a heavy backpack on a long hike; sometimes, it’s better to let some things go to move forward more easily.

Principle 7: Always Have a Plan B, C, and D

Life will not always turn out the way we want or plan. Often, it will be the opposite of what we expect. Having a Plan B and C isn’t just practical; it’s an art form that separates the visionaries from the crowd. These aren’t just safety nets; they’re launchpads for unforeseen opportunities and adventures. Spend as much time thinking about plans B and C as you do about your ‘base case’.

Plan D should be your insurance against ruin. After you’ve identified a few options for achieving your end game, your Plan A, B, and C, think about your insurance in case of total ruin. What are you going to do if all else fails, and what is your safety net? Always have some contingency built into your plans and forecasts.

Having different plans is like having different routes to get home; if one road is blocked, you know other ways to go.

The Takeaway: Risk Management Is a Skill for Everyone

By following these principles, you can help your children build a healthy relationship with risk, enabling them to navigate the complexities of life with greater wisdom and confidence. What else would you teach your kids about risk? Share in the comments.

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