I am trying here to generalize to real life the notion of the “barbell” strategy I used as a trader, which is as follows. If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed, because of the Black Swan, then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments (how do you know it is medium risk? by listening to tenure-seeking “experts”?), you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasury bills—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital–style portfolios.fn3 That way you do not depend on errors of risk management; no Black Swan can hurt you at all, beyond your “floor,” the nest egg that you have in maximally safe investments. Or, equivalently, you can have a speculative portfolio and insure it (if possible) against losses of more than, say, 15 percent. You are “clipping” your incomputable risk, the one that is harmful to you. Instead of having medium risk, you have high risk on one side and no risk on the other. The average will be medium risk but constitutes a positive exposure to the Black Swan. More technically, this can be called a “convex” combination. Let us see how this can be implemented in all aspects of life.
Taleb, Nassim. The Black Swan (pp. 205-206). Penguin Books Ltd. Kindle Edition.
Great approach.
Think how you can do it in your investments. is crypto the risky option?
Btw., the barbel strategy is a great strategy for life.
So the barbel strategy is as follows. We are very bad at predicting so you need to be both hyperconservative and hyperaggressive instead of being mildly aggressive or conservative. So, put 80-90% of your portfolio into the safest asset you can imagine and the remaining into the most speculative bets in existence. When you have such strategy, negative black swans can't kill you beyond the baseline you have determined (cuz 80-90% of your portfolio is safe, so you can't sunk) while you capitalize on positive black swans by exposing yourself to high-leverage, speculative opportunities. The most you can lose is the 10-20% you set for the risky portfolio. You avoid the errors of predictions that hurt so many. You don't predict. You accept that you cannot know where the black swans lie, so you insure yourself and create a surface (which you can afford to lose) where the black swans can land.]
Written differently (after sleep) Barbell strategy: being hyper-aggressive and hyper-conservative instead of being mildly aggressive or conservative. On one hand, you’re creating a safe ground investing 80-90% of your capital into extremely safe instruments—that is your insurance policy against negative black swans. On the other hand, you’re generating a serendipity attraction machine investing 10-20% of your portfolio into incredibly speculative bets with extremely high upside (like venture capital, crypto, etc) that way you’re exposing yourself to positive black swans. You have no risk and high risk which averages out to medium risk but contains an exposure to positive Black Swans.
Connects to R: Psychology of Money that said that most gains in life are result of a few inputs—i.e., black swans.
How to attract the most black swans as possible?
Fluid enviroments?
Other people?
Saying yes to everything?
Experimentation? I.e., doing versus theoritizing?
How to extrapolate the barbel strategy to other areas in life? Answer that. Below.
Implement the "barbell strategy": be hyper-conservative in 1 and extremely aggressive in 2.
Barbell strategy: being hyper-aggressive and hyper-conservative instead of being mildly aggressive or conservative. On one hand, you’re creating a safe ground investing 80-90% of your capital into extremely safe instruments—that is your insurance policy against negative black swans. On the other hand, you’re generating a serendipity attraction machine investing 10-20% of your portfolio into incredibly speculative bets with extremely high upside (like venture capital, crypto, etc) that way you’re exposing yourself to positive black swans. You have no risk and high risk which averages out to medium risk but contains an exposure to positive Black Swans.
Connects to R: Psychology of Money that said that most gains in life are result of a few inputs—i.e., black swans.