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Trade: Off

Trade: Off

April 20, 2020

“There are no solutions. There are only trade-offs.” – Thomas Sowell, A Conflict of Visions

Reflecting on the above quote from Tom Sowell, it seems to me that his words have never been more relevant than they are today. At a time when trade has, to a great extent, literally been turned off, we are all bearing witness to an extreme example of how trade-offs govern economics, politics, and just about everything else in life.

Much of the current political debate has centered on the trade-off between reducing the spread of COVID-19 and curtailing economic activity. With most of America sheltering in place, the coronavirus curve is being flattened and healthcare systems are being spared a worst-case shortage of personnel and equipment. However, the economic consequences have been dire for millions of people as businesses have shuttered and unemployment has risen at warp speed. Congress and the Fed have stepped in to help by providing massive doses of liquidity to individuals and businesses alike, measures that have saved us from a far worse economic collapse. Still, the trade-offs for these interventions include the threat of inflation, a record high budget deficit, and a worsening national debt problem, which we are effectively punting down the field to future generations of taxpayers.

In our search for ways to restrict the spread of the virus, one proposal that has gained a lot of traction recently is a partnership between Apple and Google to leverage smartphones for “contact tracing.” The basic idea is an app that uses Bluetooth to track people who have tested positive for COVID-19 and alert others so that they don’t come into close contact with each other. This idea, and others like it, could prove enormously beneficial, but as with so many of the digital tools and services we utilize today, user privacy is a major concern.

At this point, absent a vaccine, there are no solutions. Only trade-offs.

As I mentioned earlier, this isn’t merely a political reality or an economic one. It is true of most anything. For example:

If you want to be truly great at one thing, you’ll have to settle for mediocrity in other areas.

If you want to achieve extraordinary professional success, you'll have to make sacrifices in your personal life (and vice versa).

If you want to stand up for something you believe in, you’ll have to cope with criticism.

If you want to be healthy and fit, you’ll have to eat less junk food and exercise more.

Focusing specifically on financial planning, here are a few common trade-offs:

If you want to save more, you’ll have to spend less.

If you want to spend more, you’ll have to settle for less in retirement.

If you want to earn higher returns on your investments, you’ll have to take more risk (which means watching some of your investments decline by 30% from time to time).

If you want stability, you’ll have to settle for lower returns.

If you want to protect your assets from creditors or certain taxes, you’ll have to introduce a degree of complexity and/or relinquish a degree of control.

It’s not that solutions don’t exist, it’s just that there are always trade-offs embedded in them. Therefore, if you want to establish more realistic expectations, conduct more rational analyses, make better decisions, and save yourself from a great deal of disappointment, it’s critical to think in terms of trade-offs rather than in terms of solutions.

Jeff Bezos was once asked why he decided to end his career in investment banking to drive across the country and start an online bookstore called He explained it this way:

“I knew that when I was eighty I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the Internet that I thought was going to be a really big deal. I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried.”

What Bezos is describing is a regret minimization framework, which I think is a pretty useful means of guiding decision-making. Knowing that every consequential decision you will ever make – as an investor, as a business leader, as a parent, etc. – has a trade-off, which course of action will lead to the least regret? It’s a question we should ask ourselves often, especially during these times of heightened uncertainty and high stakes.

And Now For Something Completely Different...

If you love avocados as much as I do, you’ll relate to this stand-up routine by Sheng Wang. Warning: includes some colorful language (which, depending on your WFH situation, may or may not mean NSFW).