Do you know a person who quit his job and started his own venture? What do you hear people saying about his decision? People say, “he made the right decision, wish I could muster the courage to do the same.”
What about the person who invests his money in safe investments? People say, “he wants to hold tight onto what he has without any risk.”
The world has a habit of labeling risks as acts of courage and safe bets as cowardice. But is that judgment right? The success stories of people who took risks could appear glorious due to the survivorship bias. On the other side, playing it all safe causes loss of opportunity due to the cost of inaction.
When you take a leap of faith, jumping right into the abyss can lead to disaster. At the same time, refusing to take any risks leads to a life of mediocrity.
How people approach risk
You will find two kinds of people around you – the risk-loving and the risk-averse. Here is a visual which explains how these groups approach an opportunity.
The risk-loving folks scratch their palms waiting to pounce of a new opportunity. Let us consider Luke as one such risk loving person.
Three key factors are always running through Luke’s mind:
- FOMO(Fear of Missing Out)
Every opportunity looks like a gold mine to Luke. He feels he will miss out on the reward if he lets it pass by.
- Believing risk is the way to glory
Triggered by the success stories of people who took risks, Luke wants to achieve massive fame and loads of money by taking risks.
- Hasty decisions
In the hunt for success, Luke makes quick decisions to get huge returns. Some of these decisions are hasty because he intends to be early in the bandwagon to reap as many rewards as possible.
The risk-averse people have an allergic reaction to uncertainty. Let us consider Adam as one such risk-averse person.
Three key factors are always running through Adam’s mind:
- Fear of failure
When Adam has to take a risk, his mind gets paralyzed with the fear of things going wrong. “What if I lose what I already have?” echoes through his brain more than, “What if this risk changes my life for good?”
- Holding on to current assets
As per psychology, the grief experienced by losing far outweighs the pleasure gained by winning. This tendency is more prominent in risk-averse people like Adam, leading to more conservative actions.
- Afraid of stepping outside the comfort zone
Every risk involves some form of additional effort which isn’t very comfortable. Adam prefers sticking to his current comfort, happy with what he has currently. He does not intend to push his limits.
How to take a risk the right way
The right way to take a risk is where you neither make a hasty decision looking for a big win nor stay in a safe zone of no risk. The sweet spot of risk is where you take a risk knowing what you’re stepping into. You still have a chance of failure but you at least avoid the blatant mistakes you would have done in a hurry.
Here are 7 pointers to make a wise decision while taking a risk:
- Can you handle the worst case?
Ask yourself what is the worst that can happen if you take a risk. If you are starting a business venture, do not assume you will start making revenue from the first month. What if you fail to make any money in the first six months? Do you have the surplus funds to bear the expenses? What if you lose everything you invested?
If the worst case of your decision can disrupt your life to an extent where you have no comeback, stay away from the risk. If you can handle it with some discomfort, proceed further.
- How realistic is the best-case scenario?
If you are a risk-loving person, you look only at the best-case scenario. If you are looking to invest in cryptocurrency, you will dream about how your 10,000$ investment will turn into a million in 2 years.
Ask yourself if such results are based on your assumptions or are they backed by reasonable proof. More often than not, you might get carried away by the reward which only 1% of the people enjoy while the rest get average to poor returns from the risk.
- Have you done your research?
Your friends and well-wishers might convince you to take a risk. Sure, they might have all the good intentions, but do not rule out the possibility that they can themselves be wrong. Make sure you know enough about the decision you’re making instead of simply taking somebody else’s word for it.
If you know only a tab bit about the risk you are taking, pause and evaluate. Spend some time to research and know more about what you’re stepping into. Talk to people who have taken similar risks before and learn more about the experience they’ve had.
If can’t find a way to research, spend time reading on the internet.
- Find stories of both success and failure
When people plan to start a business venture, the most common mistake is failing to look at both sides of the coin. The risk-loving entrepreneur only hunts for other businessmen who made a fortune from a similar business. The risk-averse gentleman panics by digging into one failure story after another.
Do not blind yourself by stories of success, nor shoot down the plan due to stories of failure. Learn more about both sides of the equation and make an informed decision.
- Assess your state of mind
Your emotions have a strong influence on the decisions you make in daily life. You must have heard enough stories about people making a brash decision in a fit of rage. You lose your sense of judgment when you are under intense emotions such as anger, stress, sadness, happiness, excitement, etc.
Negative emotions derail your sense of good and bad thereby triggering you to perform an unethical activity. Positive emotions can shoot up your confidence thereby increasing the risk you take.
Before making an important or quick decision, evaluate your state of mind. If you feel you aren’t your normal self, refrain from making a decision.
- Consider the cost of inaction
Sometimes, you might undergo decision paralysis, where the complexity of making a decision causes you to not make a decision at all. When you postpone your decision you feel safe because you did not make a bad choice. But not making any decision is sometimes a bad call in itself.
For example, many people put up with a job that they hate or a relationship that they loathe because they find it too hard to make a tough decision. As a result, they fill each day of their life with stress and anxiety.
Do not only consider the consequences of a difficult decision. Also, look at the price that you have to pay for not taking any action by staying where you are. Sometimes, taking a simple risk can make your life more comfortable than sticking to what you have been struggling with.
- Are you in for the immediate thrill or the journey?
When you make a change which can impact your course of life for a long time, ask yourself why are you doing it? Often, the immediate reward can convince you to make a decision now which you might regret later.
For example, moving to another country seems exciting because of higher pay. But have you thought through about your experience of living in another country for the next few years?
If you are making a decision that impacts many aspects of your life in exchange for one tempting reward, you might have to think again. Once you make the call, you may no longer have the option of turning back.
You are the sole owner of your risk appetite. Whether you choose to increase or decrease it lies within your control. No one has the authority to label your risk-taking ability as good or bad. Whether you are risk-loving or risk-averse, only you know what suits best for you.
If you are a risk-loving person, ask yourself if your risks are reckless. If you are risk-averse, ask yourself if you’re too cautious. When you take the risks after applying thought instead of going by impulse, you will win more often than you lose.
I am Maxim Dsouza. I turned down a corporate job in a quest to build something successful of my own. In this journey, I have been a part of and contributed extensively to multiple failed startups. I am yet to find what works, but my experience has taught me what doesn’t.
Today, I write on my blog Productive Club. I share tips on how to improve productivity, overcome procrastination, improve focus and overcome fear based on my lessons learned. My approach is to never run a sprint but take small baby steps like a marathon while enjoying the journey.