“Study whatever you want,” my parents told me. To them, the most important factor was the prestige of the college I attended, not the future value of my major.
That approach served Baby Boomers and the Silent Generation pretty well, mainly because they studied and worked amid US economic dominance after World War II (when lots of countries were literally rebuilding), so jobs were plentiful. Colleges were also relatively more affordable, making them less of a high-stakes investment and more of a place for true intellectual exploration.
But when my parents told me, “Study whatever you want,” in the 1990s, things were already changing. College costs had spiked through the 1980s, outpacing inflation. Meanwhile, disparity among career fields was growing, and finance and technology earnings would outpace other industries over time. The opportunity cost of choosing a sub-optimal college major was rising.
“Two roads diverged in a yellow wood”….
Yes, hattip Robert Frost. Opportunity cost is the lost gain from the paths you didn’t choose. The roads not traveled. For example, if you go to college, your opportunity cost versus taking a job immediately after high school is the wages and experience you would have gained in four years of full-time work at that job. And if you major in journalism instead of computer science, your opportunity cost is the computer science skills and connections you don’t forge. Life is full of opportunity costs, but people tend to undercount them, because it’s easy to overlook something you never see and might not even know you lost.
Businesses also face opportunity costs all the time. They are unavoidable. But businesses do something that individuals often don’t do enough: they hedge. A simple definition is that hedging reduces downside risk. That can also include mitigating opportunity costs.
I hedge my bets sometimes.
Probably not enough. Investopedia defines hedging as “an investment that is made with the intention of reducing the risk of adverse price movements in an asset” and then goes on to compare hedging to buying an insurance policy. So, if you had a long position in Stock A (you bought the stock), you might hedge it by buying an offsetting put (a derivative) on your original stock position. Then if Stock A declined in value instead of increasing, you’d make some money from your put, even though you’d lose money on your long position.
Let’s look at how hedging can counterbalance opportunity cost, a way to essentially get some of the benefits of Choice A and some of the benefits of Choice B. You usually give up a fraction of your potential gain when you hedge, but you also drastically reduce your chances of catastrophic loss.
We’ll go back to that dorm room where my parents left me on the first day of college and said, “Study whatever you want.” I chose to major in journalism. With that choice, I forewent several years I could have spent learning and making connections in computer science, economics, or another more lucrative field. Journalism did teach me valuable skills I’ve used in every one of my jobs, but opportunity cost took its toll. The expected value of a journalism degree in pure monetary terms is relatively low. The expected value of a computer science degree is far higher. I started at a low salary and ended up attending grad school—and incurring more opportunity cost—to vault into a higher-earning profession, information security.
What I didn’t do—and should have done—was hedge the first time around. I was passionate about journalism, so I’m glad I studied it. But nothing was stopping me from pursuing a second, more lucrative major at the same time, other than my own immaturity and misunderstanding of opportunity cost and future earnings. There was no policy at the college preventing double majors. And double majoring is a great hedge. It reduces the risk of a life lived with financial regrets while simultaneously reducing the risk of wishing you’d pursued your passions. As a great hedge, it removes a lot of potential downside while adding some upside.
Yes, double majoring reduces the number of electives you can take—and those lost electives are an opportunity cost—but if a student already has a strong passion, it allows them to pursue it while also getting a degree in something that can support them if that passion doesn’t work out. It’s a rational choice that also leaves space for magic. Because there is magic in life, and decision-by-spreadsheet often leads to unhappiness. (Decision-by-spreadsheet is a whole other can of worms, demanding a whole other article that I’ll write later.)
What if a student might have become a modern Michelangelo after taking an elective that now she won’t ever take, because she double majored?
There’s always a counterexample, and hedging is never perfect in the messy real world. If our double-majoring student might have otherwise taken a sculpture elective and gone on to produce world-changing art, but will now never touch clay, that’s a massive opportunity cost. But it’s highly unlikely. By hedging, we reduce the likelihood of bad outcomes, though we can’t entirely remove risk.
Here’s another example of a good hedge: a college football star with a practical major like accounting. Of course, the student hopes he’ll have a fantastic sports career and will focus most of his effort on it. But if an injury destroys those hopes, he still has reasonable career opportunities because of his hedge—maybe he can specialize in accounting for professional athletes. If he had majored in history, he’d probably face a tougher road.
Are some hedges better than others?
You bet. This gets to another aspect of hedging: potential synergies. When you hedge, if you can in good conscience choose a hedge that has synergies with your primary goal, then your hedge can also bolster your primary goal.
For example, here’s a hedge that doesn’t have many synergies: you have a passion to become a ballet dancer, but you know dancers often retire around age 28, so you double major in dance and economics. That’s a decent hedge! But there’s not a lot of overlap between dance and economics. The Venn diagram is not very Venn. A better hedge for the dancer might be to double major in dance and pre-med, with an eye toward sports medicine if dancing doesn’t work out.
But let’s say you have a passion to become a journalist, so you double major in journalism and economics. That’s a great hedge! You’re following a path that builds ample transferable skills, which increases resilience. The analytical, communication, and investigative skills learned studying journalism can prove extremely useful in a future career as an economist, too.
So, why don’t most students double major?
Part of the answer is probably, “They’re eighteen.” Risk management is not generally the forte of eighteen-year-olds. But part of it is cultural and societal. An interesting question is why hedging, as a strategy, is so emphasized in business—to the point of debating whether there is a fiduciary duty to hedge—but de-emphasized in everyday life. Here are some non-hedge moves that are considered normal in US society:
Having only one college major
Buying as much house as you can afford, with all the attendant subtle pressure to keep up with the Joneses
Having exclusively one W-2 job at a time for at least 40 hours per week
Letting ties to friends and acquaintances fray when you couple up
If everything works out as planned, these moves can work out great and appear brilliant in hindsight. But sometimes things don’t go as planned. What then?
Like, what if I die before retirement?
Exactly. If I died tomorrow, would I be happy with my life so far? My answer is about 85% yes, which I think is pretty good. (It’s not 100% because there are no perfect hedges.)
To be clear, hedging doesn’t mean not committing to a chosen path. It means shaping a chosen life—a life in which you aim to minimize anxiety and build resilience, so if life then throws you a curveball, you can catch it and keep sailing forward. It means nourishing many aspects of yourself, instead of overwatering one aspect and letting the others wither.
It’s true that there’s a flip-side risk: spreading yourself too thin. If you’re interested in everything, you reduce your chances of achievement in any field. One way to navigate this dilemma is, as mentioned above, to choose synergistic hedges if your interests allow, and to pursue a limited number of interests at one time.
As an arbitrary example, you might limit yourself to two major endeavors and a hobby at one time and pursue them for at least a decade each. Over the course of a lifetime, you can get a lot done sequentially, which would never work if you tried everything simultaneously. Also, exploring ideas across different fields and the intersections among them can lead to breakthroughs—and make your perspective uniquely marketable.
Are you one of those “leave your job and travel the world” people? I’m picking up some YOLO here.
Not necessarily, since I don’t think everyone should follow the same path, and the right balance of opportunity costs and hedges is different for different people. For some people, the opportunity cost of giving up a chance to travel the world or start a company may be too great, and they should leave their job (with ample assets and a Plan B and C in case it doesn’t work out!). Whereas for other people, that opportunity cost may be almost zero if they’ve never aspired to start a company or embark on extended travel. And working in a large corporation has many upsides: a tendency toward higher salaries, better benefits, and predictable schedules to name a few. There are many hobbies you can pursue on the side while working a steady, fulfilling corporate role. And creativity often thrives when you’re not stressed about making next month’s health insurance or rent payment.
So, figure out which hedges resonate with your life path. Maybe you want to get a real estate license, start a website, write a book, or make investments. Maybe you’d rather develop a hobby that will sustain you in retirement, giving you not just a small (or large!) extra income, but also a purpose to keep you motivated and involved in the world.
The biggest risk may be to have no hedge in place:
If you only have one W-2 job in your 50s with no other potential sources of income, a limited professional network, and you’re not financially independent yet, you are not hedged.
If you major only in art history, take out loans to do it, and then rely on luck and hustle to make that career work out, you are not hedged.
If you subsume every other interest and hobby to your job in your 20s, then wake up realizing you’re miserable and no longer connected to the creative wellspring that fulfilled you, you did not hedge enough.
If you put off travel dreams until retirement and then find that physical ailments leave you limited, or climate change has made travel unaffordable or morally unpalatable, you did not hedge enough.
So, what are the best hedges?
In most cases, the greatest hedge you can build is your personal and professional network. The more people you know, in the more corners of the world, in the more fields of interest, the better. Cultivating meaningful connections can be fulfilling, too, provided you network with people who you like and who in turn enjoy spending time with you. Networking doesn’t have to be a blood sport; if it is, might I politely suggest you’re doing it wrong?
Beyond that, the best hedges for you are impossible for me to say. “Best” and “better” are fuzzy concepts, and a pure financial assessment—decision-by-spreadsheet—isn’t a full analysis. “Better” also takes into account personal fulfillment, professional and personal connections, values alignment with goals of the organization(s) you join, average hours and flexibility of hours worked, opportunities for career growth, organizational politics, medical and retirement benefits, and lifestyle aspects (e.g., traveling versus office versus home work), among others. Your better is unique to you and your circumstances. Your better is the decision you can best live with.
“Better” is also a concept best considered over a time horizon. What’s better for you now, or for the next five years, may turn out to be worse in 15 or 20 years. Or it may stay better. Your own course corrections, adjustments, and commitment to continued growth will have a lot to do with those outcomes. That part is under your control.
What about unforeseen events?
So true. If you’re a ballet dancer and a global pandemic hits and theaters close for two years, you’ve lost two years from an already-short career. That’s why we hedge in the first place! You need the ability to plan for and react to worst-case, middle-case, and best-case scenarios as they occur and evolve.
Sometimes your best decision might be to ease up on a hedge if your primary goal is materializing into solid reality, like a football player who is drafted into the NFL or a singer who has a #1 charting hit or a travel blogger who becomes self-sustaining from website revenue. But abandoning hedges entirely because you feel like you’ve reached your goal? That’s reckless. Because ish happens.
Why don’t individuals have the same culture of risk hedging as businesses?
Well, that is a good question. Hedging is a way to craft a path that is entirely your own, combining fields and interests until your expertise is near-unique, and to live life on your own terms while reducing risk somewhat.
On the other hand, it may be in society’s and corporations’ interest to place us firmly in a role that becomes difficult to get out of. In some ways, the default paths in society are structured to minimize your capacity to hedge, while encouraging you to commit all your chips to one outcome. It’s not in your employer’s interest for you to hedge. It’s not in your investors’ interest for you to hedge. They want you laser-focused on a goal: their goal.
But what’s your goal in life? What are you working toward? To maximize your chances of getting there, it may well be in your interest for you to hedge. Businesses do it all the time. So, to the extent your own circumstances permit, what hedges make sense for you?
Does it ever make sense to sacrifice hedges for expected gain?
Also a good question. If the potential payoff is large enough, it can make sense to sacrifice other paths and options for a while, accepting the opportunity cost of being less hedged. This decision will depend on your own personal circumstances, priorities, and compass. Think about joining the military, or taking a restrictive job that requires 90-hour weeks, or training to become an Olympic swimmer. All of these decisions reduce your ability to hedge in the near term but offer expanded economic options in the future if all goes well. They are risks—but, in the right circumstances, they can be calculated ones.
When deciding which paths to pursue or not pursue at any given time, some useful questions for opportunity cost assessment are:
What do I expect to gain from taking this path?
What alternate paths and hedges am I giving up in order to take this path? (These are opportunity costs!)
Which path or combination of paths offers the greatest expected net benefit right now, given the risks involved and given my own goals? How about two years from now? Five years from now? Fifteen years from now? On my deathbed?
To assess opportunity cost well, you need to know yourself: your own priorities, hopes, dreams, strengths, and weaknesses. Then you can best gauge your personal opportunity cost, and choose the right path and hedges—with an open mind toward course correcting as needed in the future.
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Extra, Extra!
Tangential extras for curious readers:
1. The origin of student debt - by Jon Schwarz in The Intercept - interesting view of how backlash against student protests sparked the student-debt snowball
2. The uphill battle women still face in high finance - by Benn Eifert in Noahpinion - working as an independent consultant helped me sidestep many of these issues…. but awareness of the skewed playing field is a major reason I never seriously pursued VC funding
3. With VC funding for women founders so low, how’d these women defy the odds? - by Suzanne Blake in GrepBeat: Triangle Tech News - a bit more optimistic than article #2, but still pointing out challenges women face
Interesting perspective. I can think of times in my life where I have done this - and times where I haven't. It's definitely given me something to think about.