Social Diversification

Any investor can tell you about how diversifying your assets can help you. But can diversifying your social relationships help you just as much?

In finance, diversifying assets helps to reduce risk. Having a decently-sized basket of investments allows you to have high upside potential from particular stocks, while still reducing your downside assuming one of those stocks doesn’t work out. Diversification does reduce your total upside, but this is usually seen as a good tradeoff.

Diversifying socially works in much the same way. Becoming friends and acquaintances with a wide-ranging group, with no group really knowing the other, helps protect you against social risk. Everyone has had that moment, in middle school or otherwise, where they become ostracized from the in-group because they pissed off someone within it. If all of your friends know each other, that means you’re taking on social risk. In order to reduce this social risk, you can know people outside of your in-group. When you do that, pissing off the in-group isn’t too bad – you always have someone else you can talk to.

Social diversification is special in one other way, however. Having a diverse group of friends also opens you up to a wider array of interesting ideas. In other words, it reduces your downside but not your upside! This is what makes it even more advantageous than diversification in investing – high return and low risk is possible with friends!

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