Monday, April 28, 2008

4-28-08: Theory of Everything, Part 2: Fear of the Unknown

Part Two of my general Theory of Everything is the Fear of the Unknown.

Similar to the Fear of Change, the universal Fear of the Unknown is present in nearly every situation involving human interaction. I think of the Fear of the Unknown as a subset of the Fear of Change. It's a more specific form of change, since rather than being aware of what is to come, not knowing is downright scary.

But Fear of the Unknown doesn't have to involve some great cosmic mystery. I'm sure we've all thought of the big questions; every once in a while I'll scare myself by thinking of what it would feel like one second after dying. It can be terrifying, but, it can also be more subtle. Sometimes it is simple ignorance. People tend to assume that, since they aren't aware of the good that something might involve, then it has to be bad. Sure, it's not always the case, but it's amazing how often that is true.

Let me use nuclear power as an example. With the rise in the price of gasoline and diesel fuel, which are both used to generate power, people are talking more and more about alternative fuels, specifically "green" technology. Most of the time it's solar power or wind power, neither of which have proven to be efficient or powerful enough to handle the ever-increasing demands of today's society. But why not nuclear? It has been shown to be more efficient than other sources, including fossil fuels. When was the last time we built a nuclear power plant? Not for over 30 years, at least. It's not like the ones out there are getting any better with time. We need new plants.

But… nuclear power isn't safe enough. People aren't sure about it. Since the Three Mile Island incident, which resulted in a grand total of zero deaths despite an abnormal amount of negligence on the part of the operators. Despite what people think, nuclear plants are safer now. You'd think they could dedicate as much security to these as other power plants, so is the terrorist threat as bad as people think? People immediately associate images of nuclear explosions with nuclear power plants, but they'd be more than willing to pay more at the pump and in their utility bills. It's because they are afraid of the unknown possibilities.

Sure, there are other issues with nuclear power, such as the whole "not in my back yard" mentality, which might have some of the Fear of the Unknown involved. But, the heart of the issue is that people are, in general, willing to accept more risk if it is known. It's also true of the stock market, where speculation has been more important than true earnings for decades. Some one afraid of a war with Iran can cause a spike in oil price today. It's all about risk. It's why we pay insurance premiums on our cars and health care, why we never go all-in on something we're not sure about, and why we limit our trust in people until they earn it.

It's the times when people go against the grain and take substantial risks that intrigue me. But it's not always the path to wealth. Warren Buffett, the genius investor and wealthiest man in America, was once asked what his secret to investment success was. It was surprisingly simple: "Never lose money." Buffett also only invested in companies he knew were good businesses. He doesn't like tech stocks, because he doesn't know them. So is he really a risky guy? Or is he just in touch with his Fear of the Unknown. Just ask his accountants, and look at his portfolio.

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