Prepping Basics: Understanding & Mitigating Asymmetrical Risk

When it comes to prepping, it is critical to recognize that all risks are not created equal. Given that we all have limited time and money to devote to our preparation, the question then becomes which risks do we focus on first? In this article, we explore asymmetrical risk—with both negative and positive skew—to help you understand not only the nature of risk but, more importantly, how to develop the most effective and efficient prepping plan for your family.

The ultimate goal or objective of prepping is to identify risks that you and your family may face and effectively mitigating them—either by shifting the risk-reward curve in your favor or minimizing inherent tail risks. Accomplishing this goal requires understanding the nature of asymmetrical risk—and its inherent types of skew.

Typically, asymmetrical risk is discussed in the context of investing in financial markets. In that context, Benjamin Graham, the god father of value investing, aptly noted, “The essence of portfolio management is the management of risks, not returns.” This sentiment is echoed by Warren Buffet, the Oracle of Omaha, who asserts that the two rules of investing are: (1) never lose money and (2) never forget rule number one!

However, asymmetrical risk is highly applicable to prepping as well. In fact, I would argue that managing risk is the essence of successfully managing life in general—a pursuit that is conducted in a dynamic and dangerous world.

“The essence of effective prepping is the management of risk, not the accumulation of preps.”

Wicked Prepping

In terms of prepping, we are primarily dealing with the risk (cost) of being unprepared for a crisis versus the reward of being prepared—hopefully, prepared enough to even thrive in the midst of it.

As such, prepping is akin to buying an insurance policy. You purchase insurance to protect yourself against a potential future downside risk—a large one that exceeds the more likely upside reward.

That’s prepping in a nutshell—we are preparing for significant downside risks in life.

Prepping is about effective and efficient management of asymmetrical downside risks

The Basics of Asymmetrical Risk for Preppers

Simply put, asymmetrical risk occurs when the downside risk is unequal, or greater, than reward.

For example, we can choose not to prepare for a natural disaster. There is a reward in doing so—namely, the preservation of limited resources (e.g., time and money). In fact, most folks will choose this option, focusing exclusively on the reward—oblivious to the opportunity cost of doing so.

However, that cost comes into play when we realize that—while the odds are in favor of the beneficial outcome—there still exists a very real tail risk. And that tail risk comes with a very steep cost, one that exceeds the reward (i.e., the resources saved). That’s asymmetrical risk: the risk (even if a low probability) outweighs the reward when and if it occurs.

If you’re interested in learning more about opportunity cost, we encourage you to checkout our article Masks & Social Distancing: The Real Economic Opportunity Cost.

To illustrate this concept, consider homeowner’s insurance. You could avoid purchasing this—the odds of needing it are low. In doing so, you would certainly save money along the way. However, if your house was to burn to the ground (a real tail risk), your cost (in the hundreds of thousands of dollars) would far outweigh any reward you realized by avoiding the insurance.

Now, let’s take this to the next level—asymmetrical risk comes in two basic shapes. Each shape is related to the “skew” of the risk distribution.

A positive asymmetrical risk is one in which the probabilities favor a good outcome; however, there is a long tail risk—meaning, a low probability of a highly significant negative outcome. This is akin to that homeowner’s insurance.

On the flip side, there is negative asymmetrical risk. This skew represents a higher likelihood of a negative outcome—and the possibility of an even worse one.

Legacy Food Storage

Asymmetrical Risk: Positive and Negative Skews

Another way to approach this is by focusing on the cumulative likelihood of a given outcome. Doing this helps to visualize the risk curves. Here is an example using the same sample data points as above:

Asymmetrical Risk: Shifting the Risk-Reward Curve

In this case, a symmetrical (balanced) risk curve results in a 64% chance of a neutral or better outcome. However, a negatively skewed curve would produce only a 27% chance, while a positive skew would provide you with an 82% chance.

Thus, as a prepper, it is important to be prepared for both types of asymmetrical risk—meaning, we always want to (1) take proactive steps to shift the risk-reward curve in our favor (from negative to positive) and (2) mitigate the inevitable tail risk.

Asymmetrical Risk: Negative Skew

Most people naturally seek to avoid negative asymmetrical risk—bad outcomes that are likely to occur. However, this is not always the case. For example, Covid-19 is a perfect illustration of a negative asymmetrical risk.

The empirical data now strongly points towards the majority of asymptomatic individuals incurring some degree of negative health consequences.

For more on this, we highly recommend reading our articles:

However, despite the negative risk skew, many folks are ignoring or downplaying the risk—errantly asserting that there is only a minimal tail risk for them should they become infected (as if it was a positively skewed risk). This represents an utter failure to properly understand asymmetrical risk and identify negative skew.

Asymmetrical Risk: Positive Skew

On the other hand, most people fail to prepare for positive asymmetrical risk.

Because most people will not be negatively impacted (i.e., there is a high probability of a positive or neutral outcome), they ignore the low-probability tail risk of a substantial negative outcome.

As we noted, this is the classic setup for insurance (e.g., homeowner’s, life, health, and auto).

Legacy Food Storage

Now, if the tail risk is minimal in terms of impact, then we obviously aren’t worried about it. For example, a $40 toaster oven will likely function just fine for years… but it could blow up a year after you get it. We likely aren’t going to fret about that tail risk (aka buy a purchase protection plan) because the cost of that tail risk is minimal. If it should happen to blow up, we would just buy another $40 oven (which would probably only cost $35 by then).

Again, we are only concerned with tail risks that represent significant downside risk.

Another example of this type of asymmetrical risk would be a natural disaster, geo-political conflict, or a socio-economic collapse. Things usually turn out fine (i.e., a positive skew); however, when they go bad, they tend to go really bad… and that tail risk is bitch!

In general, this is the type of risk that most preppers focus most of their attention on.

The Impact of Time Horizons on Asymmetrical Risk

The truth is that the nature (or skew) of asymmetrical risk depends almost entirely on two variables: (1) one’s time horizon and (2) one’s personal situation.

Obviously, your unique situation will play a significant role in the skew of risks you face. For example, if you live in Montana, then your risk skew for a hurricane is going to be extremely positive. In fact, it would not even be worth worrying about mitigating the tail risk for such an event—the probability would be infinitesimally small. For the sake of this discussion, we are going to skip this variable and concentrate on time horizons.

In the short-run, many risks can be characterized as asymmetrical risks that are positively skewed—for example, the risk of Yellowstone super volcano erupting.

In the short run, the probability of a negative outcome—though severe if it was to occur—is fairly low (i.e., it is a tail risk).

Stated differently, a Yellowstone eruption is an asymmetrical risk—the cost of being unprepared should it erupt vastly exceeds any cost that may be required to be prepared. However, the risk is positively skewed in the short run—meaning, the likelihood of it erupting is very low.

As such, we are dealing with a tail risk rather than a primary threat (negative skew). When it comes to positively skewed risks, we seek to mitigate the tail risk (akin to using a scalpel) rather than shifting the curve (akin to swinging an axe). Typically, our more aggressive prepping that is focused on negatively skewed risks will provide a secondary degree of mitigation for tail risks associated with positively skewed threats.

However, it is important to understand that nearly all asymmetrical risk can become negatively-skewed over longer periods of time—for example, there is a very high likelihood that Yellowstone, given enough time, will erupt.

Thus, it is critical that we are prepared for (or insured against) both positive and negative asymmetrical risks. We never want to ignore the tail risk inherent in positively skewed risks—we just address them differently.

Below are twenty of the greatest asymmetrical threats we face. Notice that each can represent a positively or negatively skewed risk depending on your time horizon and unique situation:

Natural Disasters—Environmental Asymmetrical Threats

  • Solar Flare
  • Hurricanes, Floods & Wildfires
  • Asteroid or Comet Collision
  • Supervolcano Eruption (viz., Yellowstone or Long Valley Caldera)
  • Megaquake (e.g., Along the San Andreas or New Madrid Fault Lines)
  • Tsunami (viz., Along the Northwest or Southeast Coastlines)
  • Pandemic (e.g., Covid-19 or G4 EA N1H1)

Geo-Political Asymmetrical Threats

  • EMP
  • Terrorist Act (Bio, Chemical, or Nuclear)
  • US-China Conflict (e.g. Military Conflict or Trade War Escalation)
  • Middle East Conflict
  • Blackout–Power Grid Taken Down (Whether Physical or Cyber)
  • Nuclear Event (Whether Intentional or Accidental)

Socio-Economic Asymmetrical Threats

  • Civil Unrest or Civil War
  • Economic Recession or Depression
  • Economic Collapse
  • Collapse of the Dollar (Abandoned as the World’s Reserve Currency)
  • Stagnant High Unemployment (i.e., Loss of Your Job/Income)
  • Disbanding of Law Enforcement
  • Authoritarian Seizure of Control & Power

The diversity and subjectivity of these threats highlights the reason why there is no one “best way” to prepareit all depends on your situation and time horizon.

Rather, what’s critical is that you understand the fundamentals and core building blocks of prepping, and then use them to build the right solution to fit your unique needs.

If you’d like to learn more about our take on the socio-economic threats we face, we encourage you to read our articles:

Remember, risk is a probability gameone that adheres to the law of big numbers. This means that over a wide enough time frame (or a sufficiently high number of occurrences), even low-probability tail risks will happen. And, we have no way of knowing when that will happen!

Asymmetrical Risk is a Probabilistic System

Also note, the antithesis of prepping is waiting for the proverbial S(to)HTF… and then deciding that it’s time to take action!

That’s a reactive approach—one that is almost always a day late and a dollar short!

Successful prepping is all about being proactive—creating an “insurance” plan before things get bad and you discover that you can no longer acquire the needed insurance… or the cost for it has become prohibitively high.

Effective & Efficient Prepping Requires Prioritizing Risk

While we should be prepared for both negative and positive asymmetrical risk, it is always important to prioritize—after all, we all face resource limitations (e.g., time and money).

Unlike a lot of the advice (or role modeling) being offered, we encourage new preppers to focus first on negatively skewed risks—meaning, those threats that (in the short-run) present the greatest likelihood of resulting in a negative outcome for you.

For example, if you live in a hurricane zone (or flood zone), then you should focus on that asymmetrical risk first.

Then, as your level of preparedness increases, you can begin to expand into areas more focused on lower-probability tail risks represented by positive skews.

I know it’s far more sensational to promote preparing for a zombie apocalypse or a cataclysmic pole shift… but that is probably not the most effective and efficient use of your limited resources!

At Wicked Capital, we are not interested in being sensational—we are focused on providing logical, rational, accurate, timely, and actionable facts and advice to our readers.

However, the reality is that much of the work you have already done (or will do) to prepare for the negatively skewed asymmetrical risks will, naturally, provide you with a fair degree of tail-risk mitigation when it comes to those wild card SHTF scenarios. Then, as you progress along the prepping journey, it’s simply a matter of tweaking and improving upon the solid foundation you’ve already constructed.

In other words, don’t focus first on the worst-case scenariosfocus on the most-likely ones. Don’t miss the forest for the trees!

If you live in an active flood (or hurricane) zone, it does you little good to prepare for an asteroid impact or EMP attack if doing so leaves you unprepared to survive/escape a flood (or hurricane)! However, it is more than likely that your proper (i.e., effective and efficient) preparation for a flood (or hurricane) will still provide you with at least some degree of benefit should we get smashed by that asteroid or targeted by an EMP.

Asymmetrical Risk Matrix: Prepping Priorities

Conclusion

Preppers need to understand asymmetrical riskand whether it is positively or negatively skewed.

This will enable you to develop an effective and efficient survival/prepping plan that is tailor-suited for your unique situation.

Our advice is to address short-term negatively skewed risks first. Then, you can expand your preps to tackle the positively skewed ones by mitigating tail risks (which will naturally be indirectly achieved to some degree by the former).

Again, the key is being proactive and consistent. Rome wasn’t built in day… and neither is preparedness!

Finally, the most successful prepping is that which is done on the basis of logic rather than emotion. Avoid becoming preoccupied or overly concerned with irrational fear and sensationalism and, instead, stick to a rational and empirically-sound approach.

Doing so will pay huge dividends in the long run.

As Always, hope for the best, prepare for the worst, and—in all things—pray!

Legacy Food Storage

Doug

Doug is a passionate servant of Christ and holds an MBA, BBA (Summa Cum Laude), and AAcc from Liberty University, as well as an additional two years of study at Bible college. He has over 20-years of corporate finance, accounting, and operations management experience—spanning the public, private and nonprofit sectors. He is proud to have served his country as a member of the 82nd Airborne Division and his local communities as a firefighter/EMT and reserve peace officer—experience that has provided him with a unique skill-set when it comes to emergency medicine, firearms, crisis management, and wilderness survival. Doug enjoys playing the drums, prepping, and spending time with family—especially in the Outer Banks of NC.

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