The Three Sides of Risk

I interviewed Morgan Housel a few years back as part of a side project where 2 friends and I interviewed folks we thought were inspiring and/or thought provoking.

Morgan had written a few wonderful articles about investing on The Motley Fool and I reached out after one resonated deeply. Many years later, he’s still writing as part of his fund – “The Collaborative Fund.” And, I’ve shared a few of his posts over the past year or so.

Today’s post – The Three Sides of Risk – is an example of why I’m a fan of his writing. He shares a poignant story from his time as a ski racer growing up on the slopes of Lake Tahoe. He joined two of his friends to ski in forbidden terrain at one of the largest resorts in Lake Tahoe. After one run where they experienced a mini-avalanche, he decided to call it a day.

His friends, however, decided to one more run.

Sadly, that run proved fatal. And, below are his notes at the end of the story.


I’ve been risk-averse in other areas of life ever since, too. I drive the speed limit. I obey the seatbelt sign on airplanes. I invest in index funds.

I don’t know if Brendan and Bryan’s death actually affected how I invest. But it opened my eyes to the idea that there are three distinct sides of risk:

  • The odds you will get hit.
  • The average consequences of getting hit.
  • The tail-end consequences of getting hit.

The first two are easy to grasp. It’s the third that’s hardest to learn, and can often only be learned through experience.

We knew we were taking risks when we skied. We knew that going out of bounds was wrong, and that we might get caught. But at 17 years old we figured the consequences of “risk” meant our coaches might yell at us. Maybe we’d get our season pass revoked for the year.

Never, not once, did we think we’d pay the ultimate price.

But once you go through something like that, you realize that the tail-end consequences – the low-probability, high-impact events – are all that matter.

In investing, the average consequences of risk make up most of the daily news headlines. But the tail-end consequences of risk – like pandemics, and depressions – are what make the pages of history books. They’re all that matter. They’re all you should focus on. We spent the last decade debating whether economic risk meant the Federal Reserve set interest rates at 0.25% or 0.5%. Then 36 million people lost their jobs in two months because of a virus. It’s absurd.

Tail-end events are all that matter.

Once you experience it, you’ll never think otherwise.


It is a powerful post. If you have a few minutes, I’d suggest reading it in full.