Fragility and Resilience
Imagine one day that your doorbell stopped working. By itself, that might not seem like a remarkable occurrence. Perhaps the wires connecting the button to the chime were chewed by a mouse. Perhaps a battery needs to be replaced. It would be somewhat odder if, in addition to your doorbell not working, your fridge, Roomba vacuum, streaming video services, voice-operated smart lightbulbs, and package delivery services also all stopped working at the same time. That happened earlier this week when an Amazon Web Services (AWS) outage caused some very weird downstream effects.
In February of this year, an ice storm and unseasonably cold weather caused Texas’ electrical grid operator to lose control of the power supply. Millions were left without power for more than a week amidst record cold temperatures. More than 200 people died as a result. It’s no secret that infrastructure in this country is in a very bad state, but few probably realize how rickety everything is until something like an ice storm ends up almost destroying the entire power grid.
It’s amazing how much of our daily lives depends on fragile infrastructure which can sometimes fail with consequences that are annoying at best, and deadly at worst. The interconnectedness of previously distinct, closed systems (like a doorbell) increases the likelihood of failure resulting from something going wrong in another part of the system. Sure, it’s cool to be able to see a package delivered on an app on your phone connected to the camera in your doorbell, or to tell Alexa to dim the lights, but these both rely on an extremely complicated technical underpinning masked by a slick user interface.
As mundane items such as doorbells, refrigerators, lightbulbs, vacuum cleaners, etc. all gain features which are amazing and useful, they may become fragile to the point that their ability to perform their essential function is compromised. Interconnectedness may be more of a liability than an asset. Interconnectedness is great… until it isn’t. All a fridge needs to do is keep your beer cold. All a doorbell needs to do is alert you to the presence of someone at your door. As separate closed systems, the possibility of a doorbell failure being accompanied by a fridge failure is remote. But with so much of our lives relying on the same infrastructure owned by a single company, the risk of simultaneous failure increases to a concerning degree.
Systemic risk is something that individual investors should think more about. I fear that most people haven’t built enough slack or redundancy into their lives or their finances. There is a statistic that is cited in most news stories about Americans’ financial precarity that says that 40% of Americans would struggle to come up with $400 for an emergency expense. The statistic comes from the Federal Reserve’s annual Survey of Household Economics and Decisionmaking (SHED). It may be overused and possibly misinterpreted, but US household savings rates ARE low, both on an absolute basis and relative to other countries.
There’s a documentary about ENRON called “The Smartest Guys in the Room.” ENRON, you may recall, was a Wall Street darling for years. It went catastrophically bankrupt also bringing down Arthur Andersen, one of the largest public accounting firms in the country. The film interviews many former ENRON employees, and one thing that struck me was the sad stories about people whose entire retirement savings were tied up in ENRON stock. Indeed, the executives TOLD employees to invest their retirement savings in the company stock, even as those same executives were unloading their stock as fast as possible. Those employees lost everything. Their jobs disappeared at the same time as their retirement portfolios. Over-reliance on a single company (in this case, for both a paycheck and a secure retirement) resulted in disaster. You cannot diversify away all risk. Most people are dependent on a single employer for a paycheck, but the lesson of ENRON is that you should reduce your own systemic risk by NOT having your investment portfolio correlated on a 1:1 basis with the company you work for.
The Amazon Outage, the Texas ice storm, and the lost ENRON employee retirement portfolios are all examples of how things that appear solid, and which work most of the time – Amazon Web Services infrastructure, your corporate employer, and the grid you rely on for light and heat – can all fail from time to time. We would all be well served to build more resiliency and redundancy into our lives.
How to do it?
- Establish your emergency fund. In a crunch, cash is king.
- Diversify your investments.
- Have extra on hand – beans, rice, toilet paper, clean bottled water, flashlights, first-aid equipment. Better to have it and not need it than need it and not have it.
- Multiple income streams – if you have a side hustle, great. If you have income-producing investments, great.
- As appealing and amazing as they are, over-reliance on internet-of-things appliances like a smart fridge, an app connected doorbell, etc. puts you at the mercy of the back-end infrastructure that runs the internet. It works most of the time, but when it doesn’t, everything connected to it will fail simultaneously.