From Shane Parrish’s Decision Making Course
Preparation Over Prediction
The Automatic Behavior: Position for multiple possible futures.
When I first started observing the masters of decision making, I thought they predicted the future. Now I know that’s not true.
Most people try and predict the future and then work hard to be right. Perhaps the most surprising thing about the masters of decision making is that they don’t do that at all. Instead, they prepare for the widest possible range of futures.
Preparation is much less susceptible to error, and far less dependent on luck, than prediction.
Why? Because change is constant.
Prediction requires planning for a future that is knowable. And the only thing we can predict about the future is that it’s not knowable.
When people imagine the immediate future, they simply extrapolate the present: house prices will increase, the stock market will continue to climb, our political and social institutions will remain intact.
However, the recent past is not an indicator of how things will be in the future. History tells us things will change, we just don’t know when.
The market will crumble again. Someone you love will leave or no longer be around. You will face financial and career instability.
While the future can’t be known, you can prepare for a range of bad things that will happen.
And even if nothing ever goes wrong (and we hope it doesn’t), preparing for the widest range of outcomes allows you to charge fully ahead knowing you’ve got options to deal with whatever happens.
If you’re planning for a future that depends on things being the same as they are today, you’re going to be sideswiped when things change. You will lose. Whether it’s money, security, autonomy or peace of mind, if you don’t expect the future to contain some calamity, you risk losing everything you have.
Accepting that there will be downs in life, as well as ups, helps increase the possibility of good outcomes to our decisions. When we look at the future and plan — actively plan — for bad things to happen, we’ll be more resilient no matter what comes to pass.
When the market tanks, or supply chains get threatened, or our partner gets sick, or we get a terrible new boss, we want options.
In order to preserve as much optionality as you can, you need to prepare for the worst. You need to actively imagine the worst case scenario, and ask yourself what you’d need to be able to deal with it.
And then you start building those capabilities into your life now. When you prepare in advance, you build a margin of safety.
Building a margin of safety means giving yourself as much cushioning and coverage in the future as possible. Just like shooting bullets before cannonballs, a margin of safety is saying we’re covered for the widest range of possible future outcomes.
I understand you can’t prepare for everything. Some horrific events defy imagination. And other events are just tragic, and no amount of preparation can ever give you enough optionality to deal with them.
The margin of safety is sufficient when it can absorb double the worst case scenario.
Our baseline is creating a margin of safety that can absorb twice the amount of catastrophe that would cause a crisis. Or having twice the amount of resources to rebuild from a crisis.
Margins of safety can even be as simple as increasing the time allotments you allow for in your planning. For example, if a contractor tells you they’ll be done in a month, plan for it to take two. If you think it would take you 5 days to mount a response to a crisis, have the resources available to work for 10.
Of course, there are unpredictable and chaotic events that will go beyond our margin of safety. Our goal is simply to create a margin of safety that gives us the most optionality in the future most of the time. Each time you increase risk, consequentiality, or volatility, increase your margin of safety.
So the more consequential the decision, or the riskier and more unknown the outcomes, the bigger the margin of safety you need.
And finally, if you have tons of expertise and data, you can further reduce the margin of safety.
Now, let’s apply this skill to your own decision.
Starting with the worst case scenario that we created in our previous lesson on backcasting from the future, let’s create a margin of safety.
What’s the worst case scenario?
What would it take in quantifiable resources to avoid this worst case scenario?
What would it take in quantifiable resources to rebuild from this worst case scenario?
On a scale of 1 to 10—10 being the outcomes are as stable and predictable as the force of gravity or plant growth and 1 the outcomes being as unpredictable as human emotion- how predictable and stable are the outcomes of the decision you’re making?
If it’s 1-6: Increase your margin of safety from double.
If it’s 7-9: Decrease your margin of safety.
If it’s a 10: Decrease your margin of safety, but only after getting an outside opinion. Because when we think something is 100% certain, we’re almost always wrong.
Because when we think something is 100% certain, we’re almost always wrong. Once you know what margin of safety you need, building it into your life allows you to move forward confidently with your decision. You know that if the worst case scenario happens — you’ve not only got tripwires and a plan for what to do about it — you also have wiggle room so you can get back on your feet.
Another example of how I apply this concept is when planning for renovations. Most of the time you negotiate with a contractor and then assume things will go according to plan. Alas they never do. So I budget that things will cost 30% more and take 50% more time than expected. And even those preparations have been challenged at times.
If you want to move away from the herd you need to correctly deviate from standard behaviour. That requires a willingness to look like an idiot in the short term. And that’s why people have a hard time with this behavior, it always looks suboptimal in the short run.
How can you apply this professionally?
- Don’t spend all your excess capital buying back stock, instead save money for a rainy day.
- Start new business lines when times are good, so they might support you when times are bad.
- Don’t tie yourself to your boss. While she might bring you up as she climbs, you’re preparing for one possible future.
How can you apply this personally?
- Save 10% of your money. While you’ll live less well today, you’ll be better positioned for multiple possible futures.
- Buy less of a house than you can afford.
- Identify the skills you can learn now that will be needed in the future, and start learning them today.
You’re Ready to Move on to the Next Lesson when the following are complete:
- I’ve calculated the baseline margin of safety I need in quantifiable resources for the decision I’m making.
- I’ve increased that margin of safety if the decision is more consequential or volatile.
- I’ve decreased that margin of safety if the outcome is stable or inconsequential.