We live in a world where risk is glorified.
Where it’s “cool” to take risks, and where risk-averse people are looked down upon.
We also live in a world where people don’t think for themselves and seek to emulate what they see on TV and read on social media. We glorify entrepreneur culture and entrepreneurs who take risks, so it must be cool… right?
Well, sort of.
Everyone takes risks.
But the reality is risks don’t have to be, uh, risky.
What we need are good risk management systems and strategies.
How Most People Take Risks and Why It’s Silly
Most people take risks and wear risk like a badge of honour, because it’s “sexy” and “edgy” to take risks.
They never consider the payoff or consequences compared to the risk.
For them risk taking is an attitude, not a system, strategy or calculation. So long as it “looks cool to others”, they proceed with little thought or planning.
Why do they do this?
It could be a fear of missing out.
It could be genetics—some of us are more naturally predisposed to taking risks than others are.
It could be trying to look sexy or cool.
And it’s often because it’s simpler to use emotion to make decisions than handle the information and rationality needed to calculate risk.
This is all rather silly.
What Is Good and Proper Risk Management?
It’s fine to take risks, so long as you’re employing good and proper risk management.
And good and proper risk management is about risk mitigation.
It is about taking a risk factor of say one hundred, and reducing it to fifty.
Does that make the original decision to take the risk any less “cool” or “sexy”?
And since when is a higher probability of more dire consequences a good thing?
Some conservative business people get called “risk-averse” because they’re systematic, structured, organised, and tend to think before making decisions.
But the truth is they probably take more risks than the average person who is “risk tolerant”—they just do it systematically.
Every time a business person launches a marketing campaign, development project or new initiative—that’s risk taking. They perform good risk mitigation to increase their chances of success, but it’s still risk taking. It just doesn’t sound as sexy as betting it all on a cryptocurrency startup.
What Does Systematic Risk Management and Calculation Look Like?
Systematic risk management and calculation happens in two phases:
1. Preparing to take risks
There are three things you can do in preparation of taking risks.
The first is to know what risks you should never take.
These are the risks that can result in death, or that can damage your reputation so badly that you can never recover.
Usually this means doing something illegal and going to jail.
And yes, there are always exceptions, but most of us are intelligent enough to know what they are.
The second is to set a risk threshold for yourself.
For me this is two-percent (2%).
I learnt this number from a mentor years ago and it has served me well.
What it means is that if something has a two-percent chance or less of happening, I don’t worry about it and just proceed.
Because a different mentor taught me that it is usually easier to ask for forgiveness than permission, and that fortune tends to favour the bold.
Having this threshold lets you go out and enjoy and experience things in life and do (calculated) crazy things that are interesting or new to you.
The third is to get your risk jollies somewhere safe.
This is building antifragility into your risk system with a valve release mechanism.
What it practically means is to use virtual, simulated or imaginary environments to your advantage and use them to take all the risks you want.
This could be playing sport so you can take physical risk in a relatively controlled environment.
This could be playing video games where you can run, jump, shoot, blow things up and do crazy things as much as you want without any real-life consequences.
It could even be getting cheap thrills from watching movies and series.1Though I am much less of a fan of passively consuming media.
Getting your risk taking in somewhere safe, will make you less likely to take uncalculated risks in places you shouldn’t be.
2. Actually taking risks
When it comes to actual risk taking, the standard model for handling risk is to:
Avoidance is eliminating the risk by walking away from the risk completely.
An example would be a company that chooses not to develop and launch a product in a new market.
Reduction is optimising your systems, mitigating the risk factor or improving a process to reduce the probability of risk.
An example would be the implementation of additional safety procedures and equipment on a production line.
Transference is outsourcing the risk or using insurance to cover negative consequences.
An example would be buying travel insurance to cover your vacation or business trip.
Retention is accepting the risk as it is and factoring all the consequences into your calculations.
This is what happens when you have handled the risk as much as you can, and are ready to go ahead with the calculated consequences in mind.
Specific situations in life and business will also have their own specific variables and model to factor in.
How to Apply Risk Management to Your Personal Life and Business
If we bring together our risk preparation and risk handling, we are essentially trying to:
- Control the situation as much as possible.
- Make sure there are no catastrophic consequences
- Proceed with the risk.
This works with both our business risks and our personal risks.
This is why I say that seemingly risk-averse people often take more risks that others—it just doesn’t look that way from the outside.
When we take on risk in a systematic manner, we know beforehand how bad things can get and are prepared for that.
And we know that the best case is that the negative consequences never occur, and we end up with the positive rewards instead.
What To Do Next
Do the risk preparation work:
- Note the risks you should never take.
- Set your risk threshold percentage.
- Create a steam-release valve mechanism for your risk taking behaviour.
And then start to look at your risks in a more systematic manner.
- Though I am much less of a fan of passively consuming media.
Photo by ELH Express.