Part 1 & 2 covered how to think about grouping similar and dissimilar risks.
But that isn’t all of it. There are some risks that are unique - whether in their actual type of risk or in the severity of risk - that make for a hard comparison.
To set the stage for this week I want to start with 3 anecdotes that I have witnessed first-hand in life.
First, Cheryl - now Cheryl was an extremely fit and healthy 25 year old who was married and expecting her first kid. She was very pregnant, a few weeks before she was due, she came down with an extreme and sudden fever. She laid down to go to bed and woke up in a hospital very not pregnant.
What she later found out was her husband came home to her having a seizure, she was airlifted to a major hospital as she was in sepsis and had an emergency C-section. (Don’t worry, everyone ended up fine and healthy in the end).
Second, is Buck - Buck ran his own cement business and he was good. Great in-person sales guy who was buddies with all the local decision makers. The guy won every bid and made a killing every year. He was early-30s with a multi-kid family and big & lean. He was on top of the world. He also loved to ride his motorcycle and as an ex-racer of bikes he was good (I rode with him and he made even the most experienced of us look like first-timers).
Well this story ends less happy as he died in a wreck when someone ran a red light, got hit by a big truck and thrown into Buck who was waiting across the intersection to turn left.
Third we are going to go with great-great-grandma Marge who finally passed at the ripe old age of 109. Marge’s husband died in their early-70s and she spent 30+ years waiting to meet him, but she was a sharp old broad who drove in her 100s (and well) and was playing setback the week she passed.
All 3 of these stories deal with different types of tail risks and all 3 of them are good examples of why the ‘optimal’ path isn’t always the one with the highest expected value.
When you are done with this post, you should see the value in all those ‘scams’ the gooroos are blabbering about - life insurance, annuities, long-term care, accident/critical illness riders, etc.