The philosophy on backup planing – robustness against economical downturns

for students for graduates for beginners for professionals not for executives

 

There are a lot of discussions right now about an upcoming recession. Stock markets go down from all time highs and world economy climate is falling. Since Lead and Led is about leading in general let us talk about self-commutation as  a competence for foresighting protection. But first, let us understand fear in an abstract manner to cope with the upcoming text more rationally.

Fig.1: People feel under pressure by news of recession fear.

The communication of fear

Fear is a terrible effective tool to either mobilize or paralize millions of people. Poltical influencer use it to thread indirectly people for oppressing their will upon them. A person who has analysed the communication of fear is Mr. Luhmann, a German social theorist and philosopher. His work on the communication and trust has shown that it is difficult to counter fear pressing news and speeches because they are delivered under a suggested protection scheme: Look there is a problem, I want to protect you.  Thus, news that cause fear are more interesting. This is why news have a hugh majority of bad announcements and so few good once.

Unfortunately, communcation of issues can turn to a self-fullfilling prophecy. If you are trained to fall for a certain trigger, you will take him more seriously. A common discription is “Have you seen the minority XYZ lately all over our streets?” and you will tend to identify more people as minority XYZ. You can play  this “game” by the way with birds, as well. “Have you seen all those crows lately in our streets?”. Greetings to Game of Throne.

A recession will come – for sure

And here is a problem of economical norms: It is a self-fulfilling prophecy. If you are told many time that things will go downwards, they will because people will prepare themselves out of fear. And to some extend this is good because you should always have a backstop option. Public finance builds up funds for such cases. 

But even if there is no recession, there will be at some point.  Monetarian gurus preach the financial armagedon once in a while and fun fact they are always right – at some point. The life cycle of economy has up phases and down phases. You will always hit a down phase if you preach long enough.

Lead your own future planning and risk

For the introduction of protection through one’s own action, we need to demand self-commutation. One has to admit that he or she is a part of a system and is capable of doing actions within this system on his or her own will. This is a very crucial point that has its root up to the very philsophical corner stones of identify finding. Kant’s proclamed selfimposed immaturity covers the ground of this phenomena: Being driving by its environment, will not lead you to a self-fulfilled life. You will have to take your action into your own hand.

Taking responsibilty for your own actions means that you have to also deal with risk. Risk is very difficult to handle for most people. In personal life, they are not given the deals to deal with risk – for which we have to rely on tools we know from professional circumstances working just as fine. 

Risk assessment by FTA

To cope with risk, we can use tools like Failure Tree Analysis to get a first glance of what can actually go wrong. FTA is a tool that is used in quality engineering to minimize risks and find countermeasures for certain states of a product to avoid harm for customers.

Here, we have to basically think of our unfavorable state of being unable to cope with our financial situations in future. What can be reasons for being financially insolvent? Illness, unemployment, divorce, other legal liabillities, emergency investments. These are just examples and by no mean you should take here a complete outlook for your own situation. Please always take the advice of professionals into considerations – I am not a lawyer. Coming back to the problem of risks. 

 

Fig. 1: Example of a simple Fail Tree Analysis of two layers depth for finding reasons for being financially insolvent.

The so far given examples are the first level of causes for a bad financial situation but they might not be the actual reason for why you are not able to cope with the risks. Thus, each of the items has to be checked on the second level for their cause. Let us find reasons for the emergency investment: The car could brake down, fire in the flat, your computer as a freelancer work equipment could brake as well. In Figure 2 you can find an example of level 1 and 2 risk assessments. 

For each of such root causes, you need to find your own level of countermeasure.  The countermeasure should ensure a contiuation of life with a minimum of life quality and not a build-up of backstop for a mirrored second life. For example: The car is broken – repaircosts 2000 $ as a buffer. The car is destroyed in a car crash – 5000 $ for a new car. It does not have to be 50.000 $ for a brand new car – just a certain acceptable minimum to carry on.

Safety levels of redundancy

With the stated countermeasure you can chose now your redundancy level by combinatorics. Let us take the example of the given FTA in Fig Y. How much money would you need to have robustness against at least 3 months of unemployment(9k$), one treatment in the hospital (10k$) and a car break down (5k$)? Considering, this is the estimated 24 k$ your safety budget already includes most of other electronical break downs. This will help you to be safe and feel good in so many occasions. Sure, it is “lost money” but nevertheless it has a vital purpose.

Where insurancies come into play

Not all situations are solvable by holding back money. Sure, they are but you might have simply not enough money. For such situations, insurancies have been invented. They offer safety against a small fee for certain cases. For example, if you are not able to pay legal fees on your own, you can get a legal insurrance. If you are afraid of a fire in your flat, you can choose a fire insurrance. In some countries, specific insurrancies are mandatory by law, usually these are health and unemployment insurrancies.

This situation might sound very socialistic but it is a statement of the goverment that they want to have an intrinsic system that is a backstop for common situations. Other countries like the USA have a more liberal approach. Their credo has been for most of the time that each one shall take care about they own fortune. Each of the systems has positive and negative attributes – I just want to mention that it is then different how the FTA has to be approached in the end. The magnitude of impact is lower in those countries that supply already an instutional, mandatory insurrance while keeping monthly fee higher than in the situation that you have to take care on your own.

Recap of this article

With the FTA tool presented, you are able to deal with risk and include mechanisms to prevent yourself for harm in critical situations. You are also able to show equanimity in times of panic and uncertainty. This will help you to not be as sensitive as others on scaremongering. I hope that this will bring you through your next personal (money) difficulties with more ease. Lead your own life.

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