[PMC Weekend Edition] Arbitrary predestination

Philip Morgan

(Readin' time: 3m 7s. A bit long for a Weekend Edition, but I want you to have the weekend headspace to ponder this.)

Tyler Cowen recently linked to this very interesting working paper on the determinants of college majors.

Here's an excerpt that summarizes the findings:

Students who happen to be assigned classes in one of four required subjects during the semester when they’re supposed to pick a major are twice as likely to major in the assigned subject, according to a new working paper from Pope, and Richard Patterson and Aaron Feudo of the U.S. Military Academy.

This held true regardless of how well a student did or how much they liked the course, according to the economists’ analysis of U.S. Military Academy class data from 2001 to 2015.

This is really fascinating to me because the same forces might be at play when we decide how to specialize.

As the paper's authors say, "Small and seemingly unimportant things can really have a large impact on people’s life decisions."

The first job I landed out of college was training adults to use software at New Horizons Computer Learning Center in Nashville, TN. I never aspired to that kind of job, never planned to land that kind of job after college, and never orchestrated a series of events over the course of years to get that job. Instead, it was merely the best fit for me within the context of what I could imagine and do at that time in my life.

As a self-employed pseudo-entrepreneur (specifically NAICS code PUSHYU, aka a Pusherman), so much of my work has been shaped by that early work in adult learning at New Horizons. It gave me a deep, long-lasting love of helping adults acquire new capabilities that transform their careers and financial prospects, and I'm super happy about that. It's worked out fine.

But like an arbitrary assignment to an economics class might increase the chances a college student chooses that major, my landing on a first job at New Horizons might have cast the die for the rest of my career, even decades down that road.

This is relevant as you think about specialization.

Generally, the lowest risk approach to choosing a specialization is to specialize in an area where you already have significant credibility, access, or expertise. I call this building on a head start.

I'm not far enough into Allison Schrager's new book "An Economist Walks Into a Brothel" to say if the whole book is excellent, but it starts off very well. She looks at the subjects of risk, pricing risk, and decision-making through a fascinating lens.

One of the key points early in Allison's book is that you can price risk, and you can price reducing risk as far as humanly possible. In the world of investing, the price of extremely low risk is extremely low returns from government bonds or the like. You are "paying" for this risk reduction by giving up the potential returns of a higher-risk investment.

The benefit of that low risk is high predictability. If this looks like a simple deterministic system where you give up some of X to get more of Y, that's a totally valid way to look at risk. Reality is more complex and chaotic, but the simple model of "paying" (in the form of reduced returns, insurance, or a hedge) for risk reduction is very useful here.

If you're pursuing low-risk business decisions, what are you paying for that risk reduction?

Here are a few of the usual forms of payment for reduced employment, career, or revenue risk:

  • Reduced excitement
  • Working with mature technology rather than new or innovative tech
  • Choosing less exciting clients
  • Pricing hourly
  • Building on a head start rather than testing an entrepreneurial thesis
  • Seeking the familiar (not always a realible way to reduce risk, however)

I advise my clients based on their risk profile, not mine. So even though I'm always looking for ways to push you to achieve more, I contextualize that pressure within your risk profile.

The Bottom Line: What are you paying to reduce risk in your business? Think of this as an invisible "subcontractor" you're paying or a hidden line item on your P&L. If you make it visible, what does it look like, and is it what you'd choose if starting over today?

I do hope this question haunts you. :) When you're ready to get support taking action on your answer, please reach out.