notes #13: on taking risks

When it comes to risk, most people’s first reaction is to completely avoid it. And while that’s only natural, the problem comes when our desires don’t match our risk appetite.

For a long time, reward has come to be associated with risk. If you want to get better results, you have to take on more risk.

And that makes sense. Because from an economics perspective, the places with the most opportunities and rewards are those where people aren’t there (and thus compete with you for it). And generally, our tribal brain associates the lack of people as possible danger, along with uncertainty of the unknown.

But therein lies the misconception — not all risk is dangerous, and some risk is worth taking.

First, risks that you should never take — those that have a significant, oftentimes irreversible negative impact on your life. Think drugs, crimes, actions that increase your likelihood of disability.

Selective risk-taking

How do you decide what risk should be taken? This is what some people call calculated risk — risk that have been thoroughly considered, taking into account various scenarios and possibilities.

Calculated risk overcomes the fundamental problem that we humans face — our easily fearful hearts and our tendency to avoid any kind of risk.

When making a decision that involves risk, here are some things I have learnt to do:

• Determine if the risk is bearable — in the worst case scenario, can you still accept it? Because one day it will happen

• Is the potential upside or benefits that come from taking this risk justify the potential problems it may bring? Really think about everything that could be affected — not only do you have to think about what and how, the crucial part of the equation is also how much — that is, the probability of the events happening.

The problems of uncertainty (and certainty)

Here’s the catch: calculated risk has an obvious problem — one that many people face. It’s prone to miscalculation. Haha.

Here are a few reasons why:

• We don’t have all the information — we don’t know what we don’t know, and sometimes things are just uncertain

• Biases and assumptions — sometimes (many wise people will argue that it’s the case most of the time) what we know that is wrong causes the errors

Mark’s words are rather intriguing given that most people think that it’s the former that gets us into trouble.

This is quite relevant today because generational tools tend to create an element of false certainty, and our dependence on it may pose problems down the road.

Never enough

While it might always be a good idea to take calculated risk that shows more upside, keep what Warren Buffett has said in mind — and the importance of realising what’s enough. Or check out Andrew Wilkinson’s book ‘Never Enough’.

And while risk is commonly associated with finance and sometimes health — don’t forget its role in people and relationships.

Most of our regrets come from misjudging the value of people and relationships in our lives. And so when doing your ‘calculations’ or deciding whether to take certain risks, keep them in mind.

Going forward

Finally, if you have done your due diligence and have decided to take the risk, there are two more things to remember.

Over time, you may start to doubt yourself. Fear keeps creeping in, judgment from others can influence you more than you think — and you may start to think the risk is too high.

Just like Rancho said in Three Idiots — “All is well”. Sometimes, telling yourself that is the first step to staying calm when things feel chaotic.

Always go back to your initial foundations and check if anything fundamental change — if not persevere through the tribulations and you’ll come out stronger.

But don’t forget the most important rule of all. Change is the only constant. If you see strong evidence that shows that you may be wrong, or that the risk has changed fundamentally in some manner, do a reassessment of whether to continue.

Don’t let your ego or sunk costs make you continue in the wrong direction.

And that’s it. Thanks for reading.

Cheers,
Joesurf

📖 Book [7/10] — Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein:

Key Ideas

• Evolution of Risk Understanding: How humanity's perception of risk transformed from attributing events to divine will to recognizing the role of probability and human agency in shaping outcomes.

• Risk as a Choice: Emphasizing that risk involves conscious decision-making and how taking calculated risks has been pivotal in human progress and innovation.

Quotes

• "The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk.”

• "The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control.”

📖 Book [7/10] — Never Enough: From Barista to Billionaire by Andrew Wilkinson:

Key Ideas

• The Illusion of Wealth as Fulfillment: Wilkinson's journey underscores that accumulating wealth doesn't necessarily lead to lasting happiness. Despite achieving financial success, he experienced a sense of emptiness, highlighting the importance of defining personal fulfillment beyond monetary gains.

• Defining 'Enough': Contemplate your own definition of success and the point at which one has "enough." Contentment often comes from appreciating current achievements rather than incessantly chasing additional wealth.

Quotes

• "To think about what you hate, then work backward to optimize your life to avoid the things you disliked being a part of it."

• "I had asked for something amazing and gotten something great in exchange... there’s no harm in asking.”

• "You only have to be right once to become very rich.”