Managing not Fearing Risk Aversion

Risk Calculator and Coins

All risk is scary! Affecting different people in different ways.

With risk there is always a chance of a loss but also the opportunity of a gain. The problem is losses make us feel worse ... so we fear them more! 

On one side we have the cliche “nothing ventured, nothing gained”. Offset by the other cliche “if I don’t get this right, I can get wiped out”.

Confusion reigns ... especially in uncertain times.

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There are various investment books, systems and “gurus” who claim to hold the secrets of success when it comes to investing. But one of the most compelling questions of all still goes unanswered: “Will share prices go up tomorrow? Or will they go down?”

As no one can predict the future with certainty.

Investing will always be risky.

Risk aversion affects much more than financial markets. It is ingrained in our everyday life. A word appropriately derived from the Latin verb “recicare” which means “to dare”.

Every decision that favours one choice over another entails risk.

From choosing a meal at a restaurant (you may not like the way the steak is prepared). Using your car to drive back from your end-of-year function as opposed to taking Uber (you might be stopped at a roadblock on the way back). Confessing your true affection for someone close to you (you might get rebuffed). Or slightly more drastic, river rafting down the Zambezi River (you might drown).

Conversely, the outcomes might be favourable. Great meal. Make it home without a visit to prison. Find the love of your life. A memorable adventure.

Doing something carries risk. Doing nothing has risk.

Consider the following passage from the Psychology of Speculation – Henry Howard Harper:

All speculations, and even the most conservative investments, have some element of risk. All lines of business are more or less a gamble. Marriage is a gamble. Political preference is a gamble. In fact everything in life, including our existence, is an uncertainty. Still people are not discouraged from entering into risky ventures. Those who look only for certainties have far to reach and little to find in this world.”
The risk in investing is not buying something that goes down. Or being wrong. Or finding out that the future is different from what you expect. The big threat is not knowing how to manage the situation when things go wrong. When the outcome is not what was expected. How to remain rational when the world around seems irrational.

Willingness to tolerate unexpected outcomes is strictly a personal matter.

Decisions with uncertain outcomes aren't made just for the sake of it. The risk must be outweighed by the expected positive payoff at the end. In other words, the degree of risk taken has to have some kind of expected reward that is greater than the downside.

The stock market can be seen as a scale that measures the weight of investors’ beliefs. Reflecting the balance of investors' positions. The net sum of their fear and greed. Whatever decisions are made or not made are bets for, or against, what other people are, or are not, doing.

Every choice you make is risky

Risk evaluates the probabilities of more than one thing happening in the future. The degree of risk reflecting the measure of the unpredictability of what will happen. No one knows what the future holds. Life is all about taking chances. Because all along the road into the unknown future choices and decisions are being made constantly.

We make complex risk choices about human relationships. Or more simple, but very risky, decisions about whether to skip the red traffic light. Or playing the share market risk game on a very unlevel field with very irrational players. Every minute there is concern about the future. Never knowing what it's going to bring.

There is no doubt that risk provides opportunity in an open society. But with it comes the risk of unfathomable consequences. Feast or famine. Fear or greed.

Base survival instincts and human frailties becoming more and more apparent as the world drives into an uncertain future.

About the Author Patrick

A “nevertiree.” Passionate about small business success and teaching. Every day a learner and excited by all the opportunities available today. On a mission to help SME owners find their way to financial freedom.

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