Taking Chances with Asymmetric Payoffs

Risk is a funny concept.

There are so many people who talk about risk like it’s something concrete or tangible.

Heck, I work in an entire department devoted to analyzing risk. As a credit risk quantitative analyst, I know a thing or two about risk.

What is the risk?

Risk has a negative connotation, but, in my opinion, there is a good risk, and, of course, bad risk.

To improve your career, increase your salary, and eventually, become financially free, taking good risks is key and can have a healthy pay-off.

In this post, I want to talk about asymmetric pay-offs and how smartly taking chances can further your career and your progress on the path to financial independence.

A Quick Statistics Refresher

To talk about risk appropriately, we need to touch on some statistics: what is the expected value of a situation, and what is the expectation?

Speaking statistically, the expectation of a situation is the average value over all potential outcomes – good outcomes, neutral outcomes, and adverse outcomes.

For example, let’s look at a coin flip.

If we define a heads coming up as 1, and a tails coming up as 0, then the expected value is 1 * 50% (a 50% chance of coming up heads) + 0 * 50% = 1 * 50% + 0 * 50% = 50%.

The expected value of a coin flip is 50% of the time. You should expect heads and 50% of the time you should expect tails.

To go a little more general, let’s define as a scenario with outcomes 5, 10, 15, 30, and 100. All of these outcomes having an equal chance (a 20% or 1/5 chance of happening) of being realized.

The expectation of is the average value overall outcomes, or putting this into an equation:

E(X) = (5+10+15+30+100)/5 = 32

What happens to the expectation if the chances of these outcomes change?

What if, respectively, the probability of these outcomes becomes 10%, 20%, 10%, 20%, and 40%?

Then the expected value calculation changes:

E(X) = 5*10% + 10*20% + 15*10% + 30*20% + 100*40% = 50

Not all outcomes in real life are equal… and this is something that many people do not understand.

Financial Freedom is the goal, but how can you get there?

If your goal is financial independence, increasing your income is crucial to your success. If you want to draw down your savings at 4% a year, and want to live a life where you are spending \$80,000 a year, you will need a nest egg of roughly \$2,000,000. To get to the 2 million dollar nest egg, you will need to earn, save, and invest.

If I’m making \$50,000 a year and saving \$15,000 of it, it will take me many, many more years to reach a \$2,000,000 nest egg than if I’m making \$150,000 and saving \$60,000.

How can you increase your income to build your nest egg and net worth?

You are capitalizing on asymmetric pay-offs by providing tremendous value in your work.

The True Benefits of Asymmetric Pay-offs in a Career

In my opinion, there are two scenarios where you can aggressively pursue an asymmetric pay-off:

1. Higher Education
2. A “Risky” Project at Work

I’ve been able to capitalize on both, and the owner of this site, Max, is a strong supporter of both as well, as he has grown his income on average 12% per year after getting his MBA.

Five years ago, I graduated from college with job prospects in the \$40-45k range. At the ripe age of 21, I wasn’t ready for a real job. At the time, I was working as a bookkeeper making \$16 an hour and set my sights on more education to improve my job prospects.

I entered a Master’s of Financial Math program the following fall, and upon graduation, had secured a full-time role paying \$63,000 + 8% bonus.

For \$30,000 (the cost of the Master’s program, which resulted in an \$8,000 student loan for me since I’d been working throughout the program), I had secured a role paying \$20,000+ more (hopefully in perpetuity).

Was this a risk? \$30,000 and two years is nothing to scoff at, and yes, I believe this was a risk. What if I hadn’t been successful getting a job?

But at the end of the day, this bet paid off, and asymmetrically: for \$30,000 upfront, I created \$20,000+ in value for myself in the form of additional income each year going forward.

Taking Risks on the Job to Increase Your Income

Once on the job, there are many ways to increase your value in your department.

Some work situations are challenging to navigate. Many people are trying to backstab you, and nickel and dime their way to the top. I don’t like that strategy, and instead look to provide solutions which make processes more efficient, and allow everyone to work less.

One strategy I’ve employed is creating solutions which benefit every team member. When you can scale your work, and affect many people (not just your direct self), the results are non-linear (aka asymmetric).

In my first year in my current role, we needed numerous codes to run testing on our models. Many of my teammates had their code for these models, but there was not a unifying set of codes which could be used across all models. Besides, the team was interested in adding a few more tests which would require new code.

I was up for the task. One thing I’m very good at is creating scripts which are usable for multiple situations. I ended up adding four different sets of code for the ten team members over three weeks and became a friend to everyone. I was looking to help the team, and I ended up helping everyone – saving potentially 10-20 hours per person, but also allowing the output to be unified across portfolios.

Being a servant to your team and wanting to help others is a recipe and strategy to follow to be more successful. I look to serve others and add value in any way I can.

The managers have agreed, they were quite happy with my efforts and solutions. Projects like these have helped my case for a higher salary over the past few years. In the last three years now, I’ve increased my salary from \$63,000 to \$91,000 and now being set up for another promotion in the coming 1-2 years.

Could I have failed on this project? Sure. Would I have been fired or had this failure used against me? I don’t think so, but you never know.

I’ve increased my income 10%+ a year for the last few years by using asymmetric pay-offs to my advantage. Will you take advantage of these pay-offs as well?

Concluding Thoughts on Growing Your Career through Providing Extreme Value and Capitalizing on Asymmetric Pay-offs

In this complex world, very little is linear. Non-linearity is in so many areas, and in particular, in your career.

There is so much money in this world, and through actions with asymmetric pay-offs, I believe there’s an excellent opportunity to skim a little bit off the top to get closer to financial freedom.