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Reducing Economic Vulnerability

Financial shocks may be in your forecast. Decisions now will determine how well you weather future storms.

I have two friends, whom I’ll call Bill and Bob. Both live in the same city, are members of The Church of Jesus Christ of Latter-day Saints, are in their early 60s, and have five children. Bob spent most of his career as a midlevel administrator for a regional health care system, earning $60,000 per year. After Bob’s last child entered school, his wife began working part time at a neighborhood school, earning $12,000 per year.

Bill has a tenured faculty position at a university, earning $100,000 per year, which he has supplemented for years with some consulting arrangements paying about $25,000 per year. Both Bill’s and Bob’s employers provided excellent benefit packages and both men contributed to a retirement savings plan.

A couple of years ago, each experienced an economic crisis. Bob lost his job in a round of downsizing and Bill’s longtime consulting business ended. Who was better off?

About four out of five people assume Bill must have been better off because of his higher income and more stable primary job. The fact is, Bob is far better off today than Bill.

After losing his job, Bob was unable to find comparable employment. His wife began working full time for the school district, doubling her salary and securing health insurance for the family. Bob and his wife own a modest home, which was largely paid for, and were able to scale back their expenses to fit within a drastically reduced income. Today Bob is semiretired and consults in his area of expertise when he can.

After Bill lost his consulting income, he and his wife were paralyzed with fear. Their large home, multiple cars, cell phones and pagers, cable TV, frequent vacations, and dining out proved too enticing to scale back. The couple raided their retirement savings, increased their debt, and scrambled to cover monthly expenses. Although Bill has since regained some of his lost consulting income, he and his wife face a longer working life, reduced retirement income, and a looming crisis at retirement when their lifestyle needs will again outstrip their income.

The travails of Bill and Bob illustrate several key principles for successfully living through economic crises. Success in these situations does not depend on income but on how individuals and families position themselves to handle potential economic crises—which I term economic vulnerability.


The Oxford English Dictionary defines being vulnerable as “open to attack or injury of a nonphysical nature.” The concept of economic vulnerability arises from this definition as a composite measure of two components: first, the degree to which people are open to a shock that disrupts economic life, and second, the extent of the potential injury that accompanies shock. The first component is the probability of shock and the second is the probability of economic injury. Thus, an individual’s degree of economic vulnerability is the probability that life will be disrupted by a shock and the probability that such a shock will prove damaging to economic well-being.

Shocks can occur at a number of levels. At the nation-state level, shocks may include war, governmental policy changes such as privatization or nationalization of firms/industries, cyclical events such as currency fluctuations, interest rate changes, inflation or deflation, or unemployment brought on by recession or depression. At the community level, shocks may include natural disasters such as earthquakes, droughts, or floods, and technological changes that make a region’s sources of economic prosperity and advantage obsolete. At the individual level, shocks to economic well-being may arise from death, divorce, or serious illness/disability.

Many shocks to economic life may be out of an individual’s direct control. We neither blame nor criticize citizens of war-torn Liberia or flood-stricken Bangladesh for their economic hardships. We sympathize with, rather than deride, the economic hardship experienced by workers in Wyoming’s oil and gas belt as market prices, technologies, special interest concerns, and government regulations whipsaw employment levels. We rally behind rather than abandon the family that suffers the death of a wage earner or vital homemaker.

However, there are a number of shocks that can be controlled. War or political instability may be beyond one’s control, but many individuals have some ability to move from region to region to find some protection and stability. Because markets may create cyclical hardships throughout an industry, individuals should be constantly evaluating the competitiveness and financial soundness of their employer and be willing to transfer to more competitive firms. Finally, while death is out of one’s control, divorce often proves amenable to influence through individual action. Besides providing companionship and fun, a weekly date night may be one of the best investments in reducing family-level economic shocks.

The probability of shock has a number of elements outside an individual’s sphere of control, but the probability of injury from such a shock lies largely within a person’s control. While there are some exceptions to this rule, such as those living in extreme poverty or living with some disabilities, experience indicates that the probability of economic injury from an unwanted shock will be strongly influenced by four factors—all under an individual’s control.

ATTITUDE TOWARD MATERIAL GOODS Choices that make material goods become sources of happiness and the financial impacts of these choices provide the foundation upon which injury protection builds. Profligate living and lavish spending elevate the economic risks individuals and families face. A commitment to live within one’s means and a budget that reflects this commitment provide the best defense against any shock to economic life.

RESERVES A stockpile of reserve resources such as cash savings; liquid assets including stocks, bonds, or mutual funds; food storage; or stocks of other critical resources provide a safety net against damaging economic shocks. The lack of such stockpiles increases the likelihood of damage from even short-term shocks. Reserve resources can turn some shocks from devastating sinkholes along life’s path to unpleasant, but brief, potholes in the road.

RISK MANAGEMENT The economic damage of many shocks can be reduced or eliminated through effective risk management and insurance mechanisms. Little things like smoke detectors and fire drills and big things like health and disability insurance can greatly reduce the severity of damage that disruptions to normal life may inflict on individual or family economic well being. While health insurance deductibles continue to rise and may seem outrageous, they become tame in comparison to the overall cost of an unexpected health crisis.

SKILLS AND ABILITIES Individuals who rely on obsolete skills, outdated production or management techniques, or see the acquisition of new skills as unnecessary find themselves damaged by shocks for a longer period of time than those who constantly work to keep their skills current, sharp, and marketable. Lifelong learning plays a more significant role than just the pleasure and growth of knowledge acquisition—having marketable skills may be the difference between a short step between jobs and a long-term drought of income-producing work.


The probability of shock and the probability of injury can be juxtaposed to create a 2 x 2 matrix describing four states of economic vulnerability. Economic vulnerability increases as one moves from quadrant two to quadrant three, following the path of the arrow.

A fairy tale and a fable illustrate the four quadrants. Aesop’s fable of The Ants and the Grasshopper captures the right-hand side of the matrix. Both the ants and the grasshopper were at high risk of uncontrollable economic shock—a snowy and cold winter. The ants worked to reduce the damage of this planned-for shock through diligent work and resource accumulation. The grasshopper chose the path of profligate living, failing to manage the impending reality of winter by stockpiling resources or creating any skill beyond the ability to beg.

The tale of Snow White illuminates the left-hand side of the matrix. The wicked queen and the seven dwarfs both enjoy a low probability of economic shock—after all she is a queen living in a palace and the dwarfs have stable employment in the mines. The dwarfs live a prudent and simple life. They have diversified their economic earning base to reduce risk—if one of the elves became incapacitated, the other six could carry the load. They also appear to have chosen a life not dependent on material goods to provide happiness. The queen, on the other hand, falls into two traps that make her extremely vulnerable: 1) an obsession with materialism (in this case beauty) and 2) the need to constantly compare her status with that of others. The queen’s ensuing envy actually caused her to abandon the stability of palace life and bring tragedy upon herself, Snow White, and the dwarfs.

Let’s return to Bill and Bob. Both lived in a relatively calm world with political peace and social stability. Both reduced the probability of shock by having loving families and choosing healthy lifestyles. Shock came nonetheless with two very different outcomes—each based completely on individual choices. Bob chose a lifestyle not centered on material goods and created a stock of reserve resources to help cushion the blow. Bob’s wife possessed marketable skills and was able to assume a larger role in the family’s economic life. Bob and his family chose to live as the seven dwarfs and the ants—prepared for shocks that may arise.

Bill, on the other hand, had for many years been steeped in a profligate lifestyle of material acquisition. The family did have long-term savings, which helped cushion the short-term negative impact of the shock. However, the long-term impact will likely be much different because his retirement savings had become, and were likely to remain, seriously depleted. Bill’s skills were not particularly current, and the comfort of his long-term engagement had eroded his ability to effectively market his skills; it took Bill more than one year to bring his skills—both business and marketing—up to a level where he could find new consulting work. Bill chose the grasshopper and the queen’s path, living well today with little thought for the troubles tomorrow may bring.



The case of Bill and Bob highlights the relationship between, and the importance of, the elements of economic vulnerability. First, economic well being is not synonymous with income. Bill’s high income and the lifestyle it fueled actually increased his level of economic vulnerability when viewed over the long term. Working to increase one’s means may be laudatory but will not, in and of itself, provide shelter during a storm. To build a better and more durable shelter, income must be coupled with an understanding of one’s economic vulnerability to shock. The cautionary tale of Bill bears repeating: Increased means may actually impair one’s ability to withstand shocks to economic well being.

The second lesson surrounds the probability of shock. While we must do all we can to reduce this probability, we must all be aware that many shocks lie outside our control. We should avoid the illusion that we are somehow immune from serious shock, either because we live in a peaceful and stable country, because we eat right and lead a clean life, or because we rely on divine providence to intervene on our behalf.

Sickness, disability, and death are parts of mortality, and they sometimes occur at the worst possible time. Technologies, markets, and government policies shift and change—altering the prosperity of individuals, communities, and nations. Companies, and the jobs they provide, come and go. Serious shocks to our economic well being are always lurking, and we should expect some type of shock in our earning lives.

The final lesson of the story is the real key: The injury caused by potential shocks lies largely within our control, and securing against economic injury comes from long-term choices about why, where, and how we use our income and skills. Bob’s flexibility and resilience in the face of job loss were the natural outcome of choices he and his family made over the course of several decades and countless economic transactions. Bill’s inability to see the inherent danger of living beyond his secure income and his willingness to rob tomorrow to continue living well today also reflect decades of choices. The paths of Bill and Bob did not differ by chance or divine imposition; they differed because each man made fundamental choices early in his career and confirmed those choices throughout his working life.

As I watch Bill struggle to catch up for all his lost income, I wonder if he has grown in any other way than growing gray. His confidence is shaken, and he speaks mournfully at the prospect of a much longer working life. He has not yet come to grips with the reality of a retirement devoid of many comforts he now enjoys.

Bob, on the other hand, survived the crisis of job loss, adjusted, moved on, and has grown through the experience. He and his wife view the experience as an opportunity that has helped them grow together and learn more clearly what they value most in life.




Paul Godfrey is a Marriott School associate professor of strategy. He earned his PhD and MBA from the University of Washington and his BS from the University of Utah. Godfrey has taught at BYU since 1994.

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