Risk

I think a lot about risk. My intense thoughts around risk have been a derivative of both my being contrarian in some respects, and also my interest in business, investing, and, to an extent, insurance. For most people, insurance may not sound like an interesting industry. But to me, it is fascinating. After all, many of us rely on insurance for our vehicles, homes, and perhaps in the future our college educations. We insure things because we are afraid that if something goes wrong, we will not be able to afford a replacement. If our car breaks down, most of us would not be able to go out and pay for expensive repairs out-of-pocket. If we have insurance, however, we are able to access some money to help us cover the costs. The more interesting aspect of insurance is the fact that it is the business of mitigating risk. Indeed, even insurance companies themselves — who take on risk every day — are looking for strategies to mitigate risk. This essay is not about insurance though, but rather how we should manage risk.

Consider Regret and Risk

There is one type of risk that few people talk about but is perhaps one of the most important forms of risk: career and personal decisions. We try to mitigate risk in terms of owning a car and a home, but we often fail to consider the risk that comes with our career and personal decisions. As a Stoic, I like to look at career and personal decisions through the lens of regret. If I am considering a decision, I will think about how I will feel in 5 years if I make a certain decision. Will I feel happier? Will I be wealthier? Will I be proud of how I acted in that situation? By considering these questions, I am able to better evaluate the key life decisions that I make. I think that we often underestimate how bad regret feels — the feeling of making a bad decisions. If we consider regret to be a central part of our decision-making, however, then we start to look at things from a different angle. When we think about risk as avoiding regret, we start to ask ourselves: “what would we look back on and regret?”. It is now no longer a question of what we stand to lose but can make back, rather what will happen if we don’t make a certain decision.

Everyone has different tolerances for risk, and those are derived from how well we can deal with volatility and regret. Many people are very risk-averse because they do not like volatility — they prefer consistency and security over walking into the unknown. For those people, they consider the fact that if they make a risky decision, they may look back in 5 years and regret pursuing that path. They are just naturally not interested in taking risks. For others though, they will see a risky decision as an opportunity — it is not able what they stand to lose, but what they stand to gain. Everyone sees risk in a different light; there is no definition for personal risk. I may think that college is risky because I am spending four of my best years in a standardized system rather than doing something more meaningful. Someone else may think that not going to college is risky because those with a college degree tend to earn more than those who do not have a college degree, on average. It is the same decision, but two different people will have completely different reactions. Age is also a major influencing factor in taking risks. Older people cannot take as great financial risks as younger people — they don’t have as much time to earn back money if an investment depreciates in value.

Reflect on the Past

When we are trying to mitigate risk, we should look back on our past behavior. Indeed, past performance is not indicative of future events — a disclosure mentioned very frequently in investing, might I add. But reflecting on the past gives us greater context into how we may react in a particular situation. Oftentimes, when we are making an important decision, we overestimate our abilities. This is very natural because we always think that we can overcome the next challenge. Rarely, though, do we accurately estimate how we will react in the future. We often become too invested in our emotions and do not think about how we have reacted in the past — what we did when we faced a similar situation. For example, you may think that you are prepared for a $1,000 cost after your car breaks down. But when that moment actually comes, you have likely imagined that the only thing you need to worry about is the payment. You have not considered your past emotional reactions to similar situations, and you have underestimated how you will react when your car breaks down.

A great example of this is when we are trying to predict happiness. When we dream about moving to another city, all we can picture is sitting in a coffeehouse reading a book, or enjoying the park on a sunny day. In these scenarios, though, we fail to acknowledge reality. We don’t think about the fact that it will not be sunny every day; perhaps it rains and we can’t go to the park. We don’t consider the fact that our coffee is now twice as much as we paid for it at home. In our mind, we think that everything is great because we fail to consider the context around it. This is why we are so bad at predicting how we will react in the future: we are always looking at things with a limited scope. Humans are notoriously bad at predicting the future, and when we do try, our images are often very clouded. And so when it comes to making a decision, we often choose the wrong one because we overestimate our abilities. If we look at the past, however, we can see exactly how we have reacted before, what additional problems we may face, and we can develop a better plan to help guide our actions. In sum, when taking risks, it helps to reflect on your past behavior.

Good Risks vs. Bad Risks

The best types of risk you can take in the context of careers and personal decisions are those where you may lose everything you have invested, but stand to gain 100 times what you have invested. These risks — asymmetric risks — are decisions that may cause us to lose everything, but have a significant amount of upside to be realized if we succeed. Examples of asymmetric risks include: starting a business; writing a book; starting a podcast; learning a new skill, and more. In all of these decisions, you stand to lose the time and energy you invested if they do not pay off. But you also stand to gain a lot if you succeed. Perhaps your business will take off and become worth millions of dollars. Perhaps your book will result in your earning an additional $1,000 per month. Perhaps the new skill you have learned has helped you get a big promotion at work. If you take asymmetric risks, you could lose everything, but you may also be able to change your life if things succeed. Most people regret not taking asymmetric risks, especially when they are young, because they only result in your losing what you have invested. It is easy to regret not writing a book because all that you would lose is the time and energy you invested (and you could still say that you wrote a book!).

The worst types of risks to take are those that cannot be easily reversed. Over time, our mindsets change. That is why it is important for us to take short-to-mid term risks, rather than long-term risks that have a low chance of success. In the context of careers, if we make decisions that will affect the rest of our career that we are not confident in, then we will have to deal with a large amount of regret. A common example is someone who quits their day job to start a company. If the company gets off the ground, that is great! However, if the company fails and they did not get any traction, then they may not be able to get back as good of a job as they had in the past. If we make commitments over the long-term, we often find that as our mindsets change, so does our willingness to continue to follow-through on that commitment. So we should be trying to take asymmetric risks, and we should also try to avoid long-term decisions.

Good risks are those that you will regret not taking but will not regret if they do not pay off. If you start a company that fails, at least you can say that you tried your best and acquired some experience in running a company. If you didn’t start a company, you would have have never known if you could have succeeded or failed.

I find that many people don’t take risks because the odds are not in their favor. But the problem is that the definition of risk is a decision where there is a chance of failure — there are no guarantees when taking risks. Therefore, you need to be fully aware of the odds of failure and success you make a decision. As aforementioned, humans are not good at predicting the future. However, if we fail to render an estimate of the odds based on our past experiences, then we will likely either underestimate or overestimate our abilities, and so we are more likely to fail. We will think optimistically and fail to accept reality. Or we will think negatively and fail to consider the chances of success.

Think About the Odds, and Move Them in Your Favor

Think about the odds, and then evaluate whether those odds are within your risk tolerances. In many cases, there are also ways to help put the odds in your favor. For example, informing yourself as much as possible about something before taking a risk is a way to help stack the odds in your favor — you are more likely to render a more informed decision. When you are taking risks, you should always be working to mitigate as much of that risk as possible — this is exactly what insurance companies do to ensure they can stay in business. Inform yourself, consider alternate outcomes, and be realistic. These things will help you make a better decision and will allow you to feel more confident in your final choice. If you are confident, you are less likely to regret making that decision in the future.

Thinking about regret and risk is critical in making good career decisions. Indeed, we may fail, and that feeling may not be great. However, we will feel even worse if we look back and regret not doing something for a reason that doesn’t matter in the long-term. Most risks we take will be forgotten about quickly — especially if we succeed — but the risks that we don’t take will always be in our mind: we will want to know what we could have done. For the people who say that they don’t enjoy their job and refuse to take a risk and move to another job, they will always have a feeling of regret based on what they could have done if they took a risk. But when taking risks we also need to consider reality — what will actually happen. We need to ensure we have a realistic view of a decision before making it, otherwise we will expose ourselves to more risk. Taking risks is a natural part of being a human, but it is important to fully understand the ramifications of both taking a risk and not taking a risk before we commit to a final decision.

Think about risk through the lens of regret. Take asymmetric risks. Be realistic. Always try to move the odds in your favor.

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