Taking Calculated Risks
Don’t be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better. —RALPH WALDO EMERSON
Risk Aversion
We face many risks in our lives—financial, physical, emotional, social, and business risks to name a few, but often people avoid taking the risks that could help them reach their full potential because they’re afraid. Do you respond positively to any of the points below?
- You struggle to make important decisions in your life.
- You spend a lot of time daydreaming about what you’d like to do, but you don’t take any action.
- Sometimes you impulsively make a decision because thinking about the decision is just too anxiety provoking.
- You often think you could be doing a lot more adventurous and exciting things in life, but your fear holds you back.
- When you think about taking a risk, you usually only imagine the worst-case scenario and choose not to take the chance.
- You sometimes allow other people to make decisions for you so you don’t have to make them.
- You avoid risks in at least some areas of your life—social, financial, or physical—because you’re afraid.
- You base decisions on your level of fear. If you’re a little afraid, you might do something. But, if you feel really afraid, you decide taking the risk is unwise.
- You think that outcomes are largely dependent on luck.
A lack of knowledge about how to calculate risk leads to increased fear. And fearing risk often leads to avoidance. But there are steps you can take to increase your ability to calculate risk accurately, and with practice, your risk-taking skills can improve.
Why We Avoid Risks
1. Emotion prevails over logic
Even when our emotions lack any type of rational basis, we sometimes allow those feelings to prevail. Instead of thinking about “what could be . . .” we focus on “what if.” But risks don’t have to be reckless.
We often base our decisions on emotion instead of logic. We incorrectly assume there’s a direct correlation between our fear level and the risk level. But often, our emotions are just not rational. If we truly understood how to calculate risk, we’d know which risks were worth taking and we’d be a lot less fearful about taking them.
2. We don’t think about risks
To calculate risk, we must predict the probability that the outcome of our behaviour will result in either positive or negative consequences and then measure how big of an impact those consequences will have. Too often a risk evokes such a fear that we decide not to think about it or its consequences at all. And without understanding the potential outcomes of taking a risk, we
usually end up avoiding risky ideas or dreams altogether.
Risk starts out as a thought process. Whether you’re considering purchasing a new home, or you’re deciding whether to put on your seat belt, the decision involves some level of risk. Your thoughts about the risk will influence the way you feel, and ultimately, sway your behaviour. When you’re driving your car, you decide how fast to go. You face safety and legal risks while driving on the road, and you must balance these risks with your time. The faster you drive, the less time you have to spend in the car, but driving faster will also increase your risk of getting in an accident and receiving legal consequences.
It’s unlikely you spend much time thinking about how fast to drive on your way to work each day. Instead your decision to obey the law or break the speed limit weighs heavily on your usual routine. But if you’re running late one day, you’ll need to decide whether to drive faster and risk more physical and legal danger or risk being late for work.
The truth is, most of us don’t really invest much time calculating which risks to take and which risks to avoid. Instead, we base our decisions on emotions or habit. If it sounds too scary, we avoid the risk. If we’re excited about the possible benefits, we’re more likely to overlook the risk.
The Problem With Fearing Risk
1. You don’t get to be extraordinary without taking calculated risks
Othmar Ammann was a Swiss-born engineer who immigrated to the United States. He started out as the chief engineer to the Port Authority of New York and within seven years, they promoted him to director of engineering. By all accounts, he had an important job.
But for as long as he could remember, Ammann had dreamed of becoming an architect. So he left his coveted job and set out to open his own business. In the years that followed, Ammann contributed to some of the most impressive American bridges, including the Verrazano-Narrows, the Delaware Memorial, and the Walt Whitman. His ability to design and create ornate,
complicated, and extravagant structures earned him multiple awards.
Most impressive of all might be that Ammann was sixty years old when he switched careers. He continued to create architectural masterpieces right up until he was eighty-six. At an age when most people don’t want to take any more risks, Ammann chose to take a calculated risk that allowed him to live his dream. If we only take risks that make us the most comfortable, we’re
likely missing out on some great opportunities. Taking calculated risks often mean the difference between living a mediocre life and living an extraordinary life.
2. Emotion interferes with making logical choices
You should have some fear about stepping into traffic. That fear reminds you that you should look both ways before you cross the road, so you can reduce the risk that you’ll get hit by a car. If you didn’t have any fear, you’d likely behave recklessly.
But our “fear meters” aren’t always reliable. They sometimes go off even when we’re not in any actual danger. And when we feel afraid, we tend to behave accordingly, falsely believing “If it feels scary, it must be too risky.”
For years, we’ve been warned against the dangers of anything from killer bees to anthrax. It seems like we’re constantly hearing various statistics, research studies, and warnings about so many perils that it becomes difficult to decipher the extent of danger we actually face in our lives. Take the research about cancer, for example. Some studies estimate cancer accounts for nearly one of every four deaths and other reports warn that within a few years about half of us will have cancer. Although those types of statistics can be a cause for alarm, they can often be misleading. A closer
look at the numbers reveals a young healthy person who maintains a healthy lifestyle has a relatively low risk of developing cancer compared to an older, overweight person who smokes. But sometimes it’s hard to put our personal level of risk into perspective when we’re constantly bombarded with such frightening statistics.
Manufacturers of cleaning solutions have worked hard to convince us we need powerful chemicals, hand sanitizers, and antibacterial soaps to protect ourselves from germs. Media stories warn us that our kitchen countertops have more germs than our toilet seats as we’re given visual reminders of
how fast bacteria grows in a petri dish. Germaphobic people heed these warnings by taking drastic precautions to combat the risk of coming into contact with germs. They sanitize their homes daily with caustic chemicals, scrub their hands repeatedly with antibacterial products, and replace
handshakes with fist bumps to reduce the spread of germs. But attempts to win the war on germs may actually do more harm than good. In fact, there’s research that shows getting rid of too manygerms reduces our ability to build immunity from illness. A study from Johns Hopkins Children’s
Center found that newborns who were exposed to germs, pet and rodent dander, and roach allergens were less likely to develop asthma and allergies. Fear leads many people to incorrectly assume that germs pose a much higher risk than they actually do, because in the reality, bacteria-free environments may pose a greater threat to our health than the germs.
It’s important to be aware of your emotions throughout the decision-making process. If you’re feeling sad, you’re likely to anticipate failure and avoid the risk. If you’re feeling happy, you maydisregard the risk and forge ahead. There’s even research that shows that fear of something completely unrelated to the risk can influence your decision. If you’re stressed about your job, and you’re also considering purchasing a new home, you’ll be more likely to view that home purchase as a bigger risk than if you weren’t feeling stressed at work. Often, we’re not good at separating what factors are influencing our feelings so we lump them all together.
Balance Emotion With Logic
Don’t get fooled into thinking that your anxiety level should be the factor that helps you make the final decision about risk. Your feelings may be very unreliable. The more emotional you feel, the less logical your thoughts will be. Increase your rational thoughts about the risk you’re facing to balance out your emotional reaction.
Many people are terrified to fly in airplanes. Often, this fear stems from a lack of control. The pilot is in control, not the passengers, and this lack of control instills fear. Many potential passengers are so afraid they choose to drive great distances to get to a destination instead of flying. But their
decision to drive is based solely on emotion, not logic. Logic says that statistically, the odds of dying in a car crash are around 1 in 5,000, while the odds of dying in a plane crash are closer to 1 in 11 million.
If you’re going to take a risk, especially one that could possibly involve your well-being, wouldn’t you want the odds in your favour? However, most people choose the option that will cause them the least amount of anxiety. Pay attention to the thoughts you have about taking the risk and make sure you’re basing your decision on facts, not just feelings.
Most of the research shows that we are pretty bad at accurately calculating risk. Frighteningly, many of our major life decisions are based on complete irrationality:
1. We incorrectly judge how much control we have over a situation
We’re usually more willing to take bigger risks when we think we have more control. Most people feel more comfortable when they’re in the driver’s seat of a car for example, but just because you’re in the driver’s seat doesn’t mean you can avoid an accident.
2. We overcompensate when safeguards are in place
We behave more recklessly when we think there are safety nets in place, and ultimately, we increase our risk. People tend to speed more when they wear their seat belts. And insurance companies discovered that increased safety features on cars actually correlated with higher accident rates.
3. We don’t recognize the difference between skill and chance
Casinos have discovered that when gamblers play craps, they roll the dice differently depending on what type of number they need to win. When they want to roll a high number, they throw the dice hard. When they want a small number, they roll the dice softly. Even though it’s a game of chance, people behave as if it involves some level of skill.
4. We are influenced by our superstitious beliefs
Whether a business leader wears his lucky socks or a person reads his horoscope before leaving the house, superstitions impact our willingness to take risks. On average, ten thousand fewer people fly on Friday the thirteenth, and black cats are less likely to get adopted from a shelter on
that day. Although research shows most people think crossing their fingers increases their luck, in reality, it does nothing to mitigate risk.
5. We become easily deluded when we see a potentially large payoff
Even when the odds are stacked against you, if you really like the potential payoff, like in the betting jackpot for example, you’ll likely overestimate your odds of success.
6. We grow comfortable with familiarity
The more often we take a risk, the more we tend to miscalculate how big of a risk we’re actually taking. If you take the same risk over and over again, you’ll stop perceiving it as risky. If you speed on your way to work every day, you’ll greatly underestimate the danger you’re putting yourself in.
7. We place a lot of faith in other people’s abilities to perceive risk accurately
Emotions can be contagious. If you’re in a crowd of people who don’t react to the smell of smoke, it’s likely you might not sense much danger. In contrast, if other people begin to panic, you’re much more likely to react.
8. We can be influenced by the media in how we perceive risk
If you are constantly exposed to news stories about a rare disease, you’re more likely to think your chances of contracting the disease are higher, even if all the news stories are only reporting on isolated incidents. Similarly, stories about natural disasters or tragic events can cause you to feel you are at a greater risk of catastrophe than you actually are.
Minimize Risk Maximize Success
The level of risk you’ll experience in a given situation is unique to you. Ask yourself the following questions to help you calculate your risk level:
1. What are the potential costs?
Sometimes the cost of taking a risk is tangible—like the money you might spend on an investment—but other times, intangible costs are associated with risk, like the risk of being rejected.
2. What are the potential benefits?
Consider the potential positive outcome of taking the risk. Look at what would happen if the risk turns out well. Do you stand to gain increased finances? Better relationships? Improved health? There needs to be a big enough payoff to outweigh the potential costs.
3. How will this help me achieve my goal?
It is important to examine your bigger goals and look at how this risk plays into that goal. For example, if you are hoping to gain more money, look at how opening your own business could help you with that goal as you examine your risk.
4. What are the alternatives?
Sometimes we look at risk as if we only have two choices—take the risk or pass it up. But, often, there are many different types of opportunities that can help you reach your goals. It’s important to recognize those alternatives that may lie in between so you can make the most well-informed decision.
5. How good would it be if the best-case scenario came true?
Spend some time really thinking about the payoff in a risk and how that payoff could impact your life. Try to develop realistic expectations for how the best-case scenario could benefit you.
6. What is the worst thing that could happen and how could I reduce the risk it will occur?
It’s also important to really examine the worst-possible scenario and then think about steps you could take to minimize the risk that it would happen. For example, if you are considering investing in a business, how could you increase your chance for success?
7. How bad would it be if the worst-case scenario did come true?
Just like hospitals, cities, and governments have disaster-preparedness plans, it can be helpful to create your own. Develop a plan for how you could respond if the worst-case scenario did occur.
8. How much will this decision matter in five years?
To help you keep things in perspective, ask yourself how much this particular risk is likely to impact your future. If it’s a small risk, you probably won’t even remember it a few years from now. If it’s a big risk, it could greatly impact your future.
It can be helpful to write down your answers so you can review them and read them over. Be willing to do more research and gain as much information as possible when you don’t have the facts available to help you calculate a risk properly. When the information is not available, resolve to make the best decision you can with the information you have.
Practice Taking Risks
Prior to his death in 2007, Psychology Today named Albert Ellis the “greatest living psychologist.” Ellis was known for teaching people how to challenge their self-defeating thoughts and beliefs. He didn’t just teach these principles, he also lived them.
As a young man, Ellis was incredibly shy and he feared talking to women. He was terrified of getting rejected, so he avoided ever asking a woman out on a date. But, ultimately, he knew that rejection wasn’t the worst thing in the world and decided to face his fears.
He went to a local botanical garden every day for a month. Whenever he saw a woman sitting by herself on a bench, he sat next to her. He forced himself to start up a conversation within one minute of sitting down. In that month, he found 130 opportunities to speak with women and of those 130, 30 women got up and walked away as soon as he sat down. But he started conversations with the rest. Out of the 100 women he invited on a date, one said yes—however, she didn’t show up. But Ellis didn’t despair. Instead, it reinforced to him that he could tolerate taking risks even when he feared rejection.
By facing his fears, Ellis recognized his irrational thoughts that had made him more fearful of taking risks. Understanding how these thoughts influenced his feelings helped him later develop new therapy techniques that would help other people challenge their irrational thinking.
Like Ellis, monitor the outcome of the risks that you take. Take notice of how you felt before, during, and after taking a risk. Ask yourself what you learned and how you can apply that knowledge to future decisions.
Taking Calculated Risks Makes You Successful And Wealthy
Richard Branson, founder of the United Kingdom–based Virgin Group, is known for taking risks. After all, you don’t get to own four hundred companies without taking some leaps along the way. But he’s taken calculated risks that have certainly paid off for him.
As a child, Branson struggled in school. He had dyslexia and his academic performance suffered. But he didn’t let that hold him back. Instead, as a young teen he started business ventures. At the age of fifteen, he began a bird-breeding business.
His business pursuits quickly grew as he went on to own record companies, airlines, and mobile phone companies. His empire has expanded to a current net worth estimated to be around $5 billion. Although he could easily sit back and enjoy the fruits of his labour, Branson loves to continue challenging himself and his employees every day.
“At Virgin, I use two techniques to free our team from the same old routine: breaking records and making bets,” Branson wrote in an article for Entrepreneur magazine. “Taking chances is a great way to test myself and our group, and also push boundaries while having fun together.” And push
boundaries he does. His teams create products that people say won’t work. They break records that people claim are impossible. And they accept challenges that no one else attempts. But through it all, Branson acknowledges his risks are “strategic judgments, not blind gambles.”
Success won’t find you. You have to pursue it. Stepping into the unknown to take carefully calculated risks can help you reach your dreams and fulfil your goals.
Troubleshooting And Common Traps
Monitor the type of risks you’re taking and how you feel about those risks. Also, take note about which opportunities you are passing up. This can help ensure that you are taking the risks that could benefit you the most, even the kind that cause some anxiety. Remember that calculating risks takes practice, but with practice, you can learn and grow.
What’s Helpful
- Being aware of emotional reactions to risk taking.
- Identifying types of risks that are particularly challenging.
- Recognizing irrational thoughts that influence your decision making.
- Educating yourself about the facts.
- Spending time calculating each risk before making a decision.
- Practicing taking risks and monitoring the results so you can learn from each risk you take.
What’s Not Helpful
- Basing your decisions about risk on how you feel.
- Avoiding the types of risk that stir up the most fear.
- Allowing irrational thoughts to influence your willingness to try something new.
- Ignoring the facts or not making an effort to learn more when you lack the information you need to make the best choice.
- Reacting impulsively without taking time to weigh the risk.
- Refusing to take risks that cause you discomfort.