Understand these 4 mental models to avoid bad decision-making and live a better life.

Taking risks in your 20s is what moves your life forward.

Should I start a business?

Should I quit the job I hate to pursue my passion?

Should I take some time out to travel the world?

These are huge risks to take with real consequences.

But not all risks are created equal. And unlike financial risks, taking risks in your 20s doesn’t come with any warnings on the label.

If decisions in your 20s did come with a risk label, it might read as something like this:

WARNING: Risks you take now will have severe consequences for the decades ahead of you. Take them. But take them cautiously.

At some point in your life, you will be faced with big decisions that carry risk. It is inevitable. After taxes and death, taking risky decisions are the only guarantees of life.

But that’s what makes life beautiful.

I’ve quit a well-paid job at a prestigious university to work in the social impact space. At the time, I was lucky to be a handful of students to be offered a job out of 1000+ applications.

The job was reasonable. Reasonable hours. Reasonable people. Reasonable benefits. Great pay. But the work was excruciatingly repetitive. Every day felt the same. After less than a year, I knew I couldn’t stay here for long. Not if I wanted to keep my sanity. I was one more ‘conversation about the weather’ away from completely exploding at work.

The decision to leave seemed like a risky one. I was leaving a stable, well-paying job at a time when even having an entry-level job for a graduate was highly competitive.

When I said I was leaving, my manager couldn’t believe it. My friends and parents couldn’t believe it. But I could. I just didn’t see myself there for years on end doing a meaningless job that didn’t give me any satisfaction.

The majority of people would think that making a six-figure income for a 22-year-old graduate was fantastic. But settling for something only reasonable at 22 seemed depressing to me.

I had a feeling at the time that if I looked back on my life and I had stayed in that job a moment longer, I would always look back on it as a regret. Like I could have done more in the prime years of my life.

But at the time, this decision seemed like a monumental risk. Like I was putting everything on the line. I felt like a failure. I had guilt that I couldn’t hack it in this environment. Like I was taking the easy option out.

But looking back, it seemed like a no-brainer.

I tell myself now: “of course, you should always follow your interest and passion if you’ve found it. Not doing so would be disingenuous to yourself. And money always follows the impact you make.”

But if I had learned more about risk and how to take them, I could have saved myself a lot of anguish and doubt about whether I had made the right decision or not.

From this experience and many others, I learned that:

• Some risks are necessary but not sufficient.

• Some risks are foolish but harmless.

• And some risks should be avoided at all costs.

Knowing which risks to take is intelligence; knowing which risks to avoid is wisdom. You can gain a lot from simply avoiding bad risks.

There are some risks that you should never take, no matter how big the potential payoff. Anything that risks your:

• Reputation

• Relationships with friends, partner and family

• Health and mental well-being

You can spend a whole lifetime trying to repair damage to your reputation, poor health or relationships. But even when you repair a shattered mirror, you can never fully remove the cracks.

And sometimes you can never repair them. Once the damage is done, it is done.

• I’ve seen talented, ambitious and hardworking young people burn out completely and never recover from it.

• I’ve seen reputations ruined for life by someone trying to take unnecessary shortcuts or a snap decision to earn a quick buck.

• I’ve even ruined relationships with friends over stupid and selfish decisions I’ve made.

Your health, relationships and reputation can take a lifetime to build and a moment to destroy.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.” — Warren Buffett

Why decisions in your 20s matter more

The decisions you make today dictate how you will live tomorrow.

So how you manage risks is important, especially as a young adult. You create a certain path dependency for your life. The decisions that you make when you’re young will dictate how you live when you’re older.

In your 20s, you will have to make life-changing decisions, almost on a yearly basis. Who to marry, what job to work and where to live. These decisions have risks and can impact the best years of your life and beyond.

I know what you are thinking. Risk is not sexy to think about. I get it. You want to live freely and unencumbered. But the fastest way to lose your freedom is by ignoring risk.

Talking about risk gets a poor reputation in accounting and the legal professions. Whenever I hear the word risk, I picture a boring middle-aged person who has lived an equally boring life — no offense, kind of.

But understanding the logic of risk means you can capitalize on the potential upside. You could live a happier, healthier and wealthier life while taking fewer but more high-leverage risks.

Understand Black Swan events

Things seem highly unlikely to happen until they do.

COVID-19 is the most recent Black Swan event that most people can relate to. The pandemic seemed to come out of nowhere and had devastating social and political consequences.

In retrospect, there was scientific consensus amongst leading infectious disease experts such as Michael Osterholm and Hans Rosling that a global flu-like pandemic was inevitable due to the way we currently live, travel, and work.

Nassim Taleb views the Black Swan events as a guiding principle to how we understand historical events and how we should prepare for the future.

If we only ever prepare for what’s happened previously, we will never be prepared for what might happen in the future. By definition, every life-changing event has never happened in the past.

While we know that highly unlikely events happened in the past, such as 9/11 and the Global Financial Crisis, we remain under the illusion that this won’t happen in the future.

We should be preparing for highly unlikely but devastating events occurring. Could your business survive a more severe pandemic? Could your mental health survive a long lockdown?

Before 2020, these were questions that we never asked ourselves. They seem pretty ridiculous. But yet here we are.

Understand the Law of the Vital Few

Also known as the 80/20 principle, the Law of the Vital Few dictates that 20% of your decisions account for 80% of the changes in your life.

Similarly, 80% of your decisions may only have a 20% impact on your life.

Simply put, some decisions are more important than others.

What are the 20% of your decisions that have a disproportionate impact on your life? Marriage, kids, career and where you choose to live. You should give these few but vital decisions a lot of time to think about.

You might be thinking: No shit, Michael. Tell me something I don’t know. But I am constantly surprised by how little thought people give to who they choose to spend their life with or what they decide to do for work.

In her book The Defining Decade, Meg Jay calls this ‘sliding, and not deciding.’

At first, you take a job you can tolerate. The work is boring but the security lulls you into comfort. You stop being intentional about your career and work. Ambition is quickly replaced with the facade of security.

You fall into a romantic relationship because you have the same hobbies, and it is easy. You move with each other because it saves on rent and is convenient for both of you.

But at no point are you being intentional about whether your values align or you enjoy each other’s company.

Does any of this sound familiar?

Understand compound interest

“$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday” — Morgan Housel

Our minds are not equipped to understand the power of compounding. It seems to defy logic. A humble start can lead to extraordinary results if given enough time.

We live in the age of instant gratification: one-click shopping, on-demand streaming services, and the constant stream of social media approval.

As a society, we are quickly losing the ability to leverage the power of compounding. Everyone wants everything yesterday. No one wants to sacrifice small amounts today for huge payoffs tomorrow.

The proliferation of social media gurus promising get-rich-quick schemes is an indictment of our inability to be patient. Supply follows demand. People want to be seen as wealthy rather than to be actually wealthy.

But the power of compounding applies to more than just financial investments. They apply to all areas of life:

• Relationships: the best relationships are long-term ones — both romantic and friendships.

• Health: the best workout routine or diet is the one you can stick to the longest.

• Networks: the bigger your network, the more people you tend to attract.

If you aim to only improve 1% a day, over the course of a year, you’ll get 37 times better than when you started. That’s the power of compounding: a humble start and an extraordinary finish.

Understand the difference between bounded and unbounded risk

One of the ways I’ve approached risk is understanding whether it is bounded or unbounded.

Bounded risks are great. These are risks that have limited downside but unbounded upside. They might cost you up-front such as investment in time, money or resources, but there is no ceiling on the potential upside.

Starting a blog, podcast, or YouTube channel is an example of bounded risk. You invest some time in content creation, some money in equipment or a membership.

If it doesn’t take off, you have a bounded loss. You can’t lose more than what you invested in. But if it goes viral or you find a highly engaged audience, there is no limit to how far it can go.

You can theoretically reach anyone with an internet connection and access to your platform.

Unbounded risks are not so great. They are terrible. These risks have no limit to how much you could potentially lose. No matter what the potential payoff is, unbounded risks should be avoided as a general rule of thumb.

Anything risk that puts your health, reputation, and relationships on the line are an unbounded risk.

Unfortunately, risks don’t tell you upfront whether they are bounded or unbounded. Like I said earlier, there is no warning label on the bottle. That would make life a lot easier.

Take time to understand what the downside is. Negative planning through a premortem is sometimes more helpful than toxic optimism.

Summary

This article is not intended to prevent you from taking risks. I want you to do the exact opposite. I want you to take more risks.

But take more of the good risks and use these tools to ensure you understand how to do that.

While you might have to take some big risks in your 20s, you’ve got the advantage of time. Risks are a natural part of life. The difference between having a great life and a good life is your approach to risk. Even increasing your ability to take good risks by 10% will improve your life dramatically.

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