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The sudden buzz in the AI field and the predictions of what it can do has been a storm in the recent days. The news which carried most of the weightage was about replacing jobs currently held by humans by AI. This is a general trend in the capitalist societies, because the ones who could try on new tech is the one with the access and control to capital, who can hire either tech or labour.

So the conversations are about how to create a cheaper present and save capital instead of dreaming up newer future with the advancements. What job does a new technology disrupt? Different technologies disrupted different jobs over time, generally the one that is disrupted has been a hard to learn skill. Before the emails, and messaging became ubiquitous; a career as a typist made a lot of sense. That job quickly became redundant with word processors giving formatting & correcting abilities which encouraged a lot of DIY.

I have a personal example when I was a billboard maker during my college days. We were reliant on artists for painting billboards and getting their time and negotiating the rates were quite difficult. Within a span of a year or two I witnessed computers becoming very cheap and desktop publishing becoming more common. All of a sudden we were able to DIY entire design in a PC, get feedback from customer and quickly iterate, deliver it in a record amount of time compared to hand painted billboards.

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The crux of disruptions have always been DIY or cheap automation. If we see from that point of view, what executives are dreaming of a cheaper present in the software industry by replacing programmers with AI is not feasible, instead it is the other way around. Programmers are mere translators of business solution into what a computer can understand. Even with AI, executives won’t be having the patience or the skill to get the AI to understand and solve their business problems through technical solutions. Using AI will either become a higher order programming or augmentation to programming in the near term.

On the other hand AI will provide abilities of a CFO, CEO, COO and other executives in a cost effective, time efficient way to a board or a young inexperienced executive, who can compete so easily with veteran executives by teaming up with AI. It is this position that is under risk due to AI than the run of the mill programming jobs who just needs to skill up on how to team up with AI or equip AI. That is the new future we are heading towards.

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As we had seen, passive savings and narrow investment portfolios may be very efficient but they do not build resilience. Being financially resilient is hard work, maintaining the socio-economic status after unforeseen events is the key factor.

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  1. As a salaried person, understand and tune the skills to the market that will keep us employed for a long time. Each economy is different and is dynamic, mindless savings to aim for early retirement will put a strain on mental and physical well being. Once we do not work, the cash flow stops and we would not realise how fast the reserves deplete. Aim for resilience, sustainable lifestyle than early retirement. More here
  2. Cheap loans are everywhere, which will tie you to hefty monthly repayments. Any thing that demands a huge monthly outflow puts a dent in the resilience. Try saving up, if possible fund big purchases like car and homes with as less loans (or lesser tenures) as possible. More here
  3. Resist the temptation to succumb to marketing. Think like a Finance officer, not as a Marketing Executive who has a budget to spend on improving brand recognition. It is your money to be invested at your discretion for your future self, don’t be hard on your future self and end up disposing of what is in hand. More here
  4. Risks are difficult to understand and mitigate. Tail risks are even harder to imagine and plan for. Unless someone diversifies their portfolio of savings and investments along with insurance, safety gears, high quality equipments, healthy habits etc, it is hard to mitigate. It is inefficient to be resilient, but resilience keeps you afloat in dire situations while efficiency drowns you. More here

Summing it all up, realise the concepts of resilience as early as possible. Nothing is too early to learn when it comes to finance. Try to pass on this knowledge to the young ones as soon as possible in a practical way so that they don’t have to learn the hard way. I realised this as an intern in a different town, who was sick in the middle of the month, no cash in bank, hefty credit card dues. Luckily came out of that mess, but learnt a very valuable lesson and changed how I look at finance forever.

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Based on our ability to foot the bills for standard of living we are often placed in socio-economic classes. The middle class is one long continuum before reaching affluent or HNI class. What I observed is, unforeseen events can push an individual and their families a notch or two below their current status more often than well planned savings and investments pushing individuals few notches above. Thereby it is easy to lose wealth than to gain and keep it safe, so extra care needs to be taken to preserve it. Someone who has an enviable lifestyle of a luxury apartment and a D segment car can lose it all within a month due to either a natural disaster or an accident which was never thought of.

These type of risks are tail risks, we are inherently optimistic and given the low probability of these high impact events we always think that such cases never happen. So we never have a mitigation plan in place. These risks when materialising will not just cause a setback, it ruins. Tail risks cumulatively increases, which means though as a single risk in single exposure looks negligible, multi risk, multi exposure over time will increase the likelihood of ruin very much.

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Consider the following risks taken together – You don’t wear a helmet while riding a motorcycle, you frequently ride in the night in accident prone highways, you don’t sleep well often, you don’t eat a balanced diet, your motorcycle is not maintained routinely. The combined risk of having a serious injury has a very high likelihood thereby leading to a ruin.

Some tail risks like lifestyle diseases can be avoided altogether with a healthy lifestyle, many others like a geopolitical instability can’t be mitigated but can only be prepared to sail through with diversification of holdings. Insurance is a good option against many unforeseen circumstances, though many people view insurance as a expense, it is a way of paying it forward and praying such a scenario never happens. Someone not paying for insurance will have some money left in hand but at the grave risk of losing it all.

Identifying the tail risks in our life and planning for a mitigation is very much necessary. Being poor is expensive, once we are knocked off the socio-economic position, it is very difficult to claw back on to the same position. Mitigations are not just insurance, it is healthy lifestyle, adherence to safety standards, avoiding risky behaviours, hedging, diversification etc.

I like Nasim Taleb’s work on this topic and much more on probabilities. We don’t realise the skin in the game in the long term as we are too short sighted as a common human.