How to take the right kinds of risks
What is the biggest chance you have ever taken?
Did it involve:
- Starting a business?
- Asking someone to commit to a relationship?
- Putting yourself at risk physically?
- Making an investment?
Most of us probably can't recall many instances involving high risks. Our tendency is to choose the safest option. On the other hand, some people try to feel more alive by making risky choices.
Let's examine the kinds of risks that are worthwhile. In addition, we will discuss errors and biases that lead people to take the wrong approaches to risk. Finally, we'll examine some principles that can help us make wise decisions.
Risk and opportunity are two sides of the same coin, as in the phrase, "Nothing ventured, nothing gained." What sort of ventures are worthwhile?
We all want to improve our financial situation, and hourly wages can only get us so far. While investments can have a real impact, they also offer the possibility of greater losses.
Getting a business up and running can be challenging work with many possible risks and rewards.
Social risks go beyond asking the popular girl out on a date:
- Assertiveness can get us what we need or want, or it can cause others to avoid us.
- It can be inspiring to say things others hold back from saying, but it can also result in pushback from those who don't want to hear them.
- If you change a mistaken belief, you risk losing social ties with others who hold that belief.
- If we ask others for help or favors, we can either get what we want and need, or we can annoy and alienate them.
- When we listen well, we can strengthen relationships. However, we may hear things we do not want to hear. We may also feel that we are not being heard.
As a means of simplifying and making sense of all the input we receive, our brains oversimplify in predictable ways. When it comes to risk:
- When the expected outcome is positive, we tend to make risk-averse choices, but when it is negative, we tend to make risk-seeking choices.
- As perceived safety increases, we tend to take greater risks.
- As opposed to reducing a larger risk substantially, we prefer eliminating a small risk.
- Often we make the mistake of acting as if our information were 100% certain.
- In general, we perceive risks as inversely proportional to perceived benefits. This is not always the case.
- We often fail to realize that a small probability of a bad thing happening doesn't mean it won't happen.
We often go into "prospection" mode when thinking about the future. Instead of evaluating what will probably happen, we create scenarios based on what we hope to accomplish. Our thinking can be distorted by overly optimistic estimates of success.Baumeister, R. F., Vohs, K. D., & Oettingen, G. (2016). Pragmatic Prospection: How and Why People Think about the Future. Review of General Psychology, 20(1), 3–16. https://doi.org/10.1037/gpr0000060
Then again, sometimes our fears make a risk seem more daunting than it really is.
Let's say you have $10,000 and someone offers you the opportunity to make a high-risk investment. A $1,000 investment has a 60% chance of doubling and a 40% chance of losing. Would this be a wise investment?
Imagine you invest the money but lose it.This is the "first side" of risk. Will you regret making the investment? Will you do it again?
Let's add another dimension. What if you had the same opportunity every week? Would you try again?
Despite the initial negative experience, it would be foolish not to take advantage of this opportunity. You will eventually gain more than you lose. Occasionally you'll lose money, but you'll double your money more often. Long-term, you'll come out ahead.
This illustrates that taking a series of small risks can result in big gains. Many people find this difficult because we don't like losing. When the odds are favorable, as they are in a case like this, the opportunity cost of not investing is substantial. A proportion of all worthwhile risks will fail. If you don't keep taking risks like this, you are unlikely to achieve success.This is the "second side" of risk.
We can apply the same principle to social relationships as we do to other investments: Take more risks. It's possible that you will alienate some people, but if you are reasonable, your other relationships will be more rewarding. Keep these points in mind:
- Always be providing value. It will be easier to get something from someone when you need it.
- Avoid anticipating rejection.
- Make the first move to improve the relationship. Take the initiative and show vulnerability.
- Although popular things appear to be safe because so many people are participating, they are actually the most dangerous because they are the most competitive. Taking a risk when others are avoiding it is better than taking it when they are competing with you.
- When something seems too good to be true, it probably is. Always assume you're missing something.
- Do not take big risks based solely on intuition. Do your homework, use statistical analysis, and get advice from others, especially those who might disagree with you.
- Never risk more than you can afford to lose.
- Keep an eye out for "tail risk" or "tail-end consequences." Always consider the worst-case scenario. The worst can happen to you. If you take enough similar risks, or if you take on a big project, the consequences will happen to you. For example, avalanche zones are dangerous, and skiers who enter them often enough (which may be just one time) will encounter this deadly phenomenon.This is the "third side" of risk.
- Every day, improbable things happen, and probable things fail to happen.
- By taking a close look at actual risks and putting them into perspective relative to other known threats, as well as by developing interventions, we can reduce both fear and actual danger.
- Become familiar with the notion of reversion to the mean. Investments that seem risky today may do well tomorrow. A performance that is overvalued today will fall in value in the future.
People who accept challenges and take risks in order to grow, and learn from their mistakes when they fail, have higher self-esteem. Self-esteem also gives one the confidence to take more risks.
Self-affirmation - reflecting positively on an aspect of one's identity that is unrelated to an area of risk - leads to people being more willing to examine material that can help them understand their risks.I'll write more about this subject in a future article.
In self-distancing, both the bias of overweighting small probabilities and underweighting large probabilities are reduced.
The way we spend our time determines the kind of life we live. If your life ended tomorrow, would you be able to say that you had done what you truly cared about? What would you be willing to do for the rest of your life? What would it take for you to pursue it now?
We often avoid choosing a life that makes us happy because of our fear of change. Is it anxiety or a lack of imagination that prevents us from living the life we want?
Find out how you can make a positive contribution to society, and get started today. Take on challenges and risks in order to grow, and learn from your mistakes when you fail.
Have the courage to be the kind of person you want to be while spending your time in a way that serves others and brings you closer to the life you want. Will it be worth it? You bet your life.