Academic & Career Coach, UNITED STATES
Not too long ago in the fall of 2008, the financial market was unstable. The stock market reported the decline of countless stocks. It was an emotional roller coaster for many investors. Experts encouraged everyone not to panic and withdraw their investments. However, fear and anxiety led many to ignore the experts. Those closer to retirement were less inclined to take a risk with their life savings – particularly if they had not diversified. Others were able to confidently ride out the crisis and purchase stock at “bargain-basement” prices.
Types of Risk
According to Tina Seelig, there are five types of risks: physical, social, emotional, financial and intellectual (Seelig, 2010). Although it’s possible to feel confident taking risks in one area of your life you might not be equally comfortable taking risks in another. However, regardless of the risk you are considering common considerations take place.
Perception of Risk
How one views risk is a continuum and can range from risk aversion — a preference for a sure outcome over a prospect with an equal or greater expected value, to being a risk seeker, a preference for a sure outcome over a prospect with an equal or greater expected value (Tversky & R., 1995). People who are risk averse are more conservative and have a tendency to invest in safe, low yielding financial options and secure employment with limited advancement (CramerA., J., N., & C.M., 2002). These attitudes can lead to stagnation, while being a risk seeker can lead to premature death through smoking, drinking, drugs, unsafe sex reckless driving or gambling. The key to risk is managing it to achieve the desired outcomes you desire in the decision-making process
How Do We Manage Risk?
- Attitude is Everything
The more you desire to avoid risk, the greater chance of making a decision that will not be in your favor. The more you avoid risk, the greater your chances of becoming stagnate and no decision will take place. Perceiving risk as good will move you forward.
- Know your World
Collect as much as you can about the topic as possible. The more you know, the more you can make an informed decision. Businesses use a S.W.O.T. analysis to evaluate the health of their business. S.W.O.T. stands for identifying your strengths, weaknesses, obstacles and threats. For each category, consider all of the possible scenarios which can occur.
- Be open-minded and acknowledge we all have a cognitive bias that is our Achilles heel. It’s what we don’t know that will hurt us.
- Be aware of arrogance and being unwilling to hear another’s point of view or suggestion
- Temper ambition and experience. When the two are misaligned, that’s when experts are especially needed to serve as a buffer for the knowledge and experience you may lack.
- Consider your emotions and know emotions aren’t bad or good. When taking on a new risk, consider how you view emotions. Anxiety, for example tends to occur when risk is high. However, emotions such as fear and anxiety can focus our energies in a positive way and motivate us to perform.
- Bring in Experts
Do not rely on only your knowledge to make decisions. Just like driving a car, there is a blind spot that you will not be able to recognize, because we all have a cognitive bias. Get another point of view.
- Plan for what can really hurt you
Being aware of potential threats is not enough. You must plan for them to minimize their impact
- Step back from the situation and evaluate what worked, what went wrong and develop an improved plan
- Where are “stuck” and you are not moving forward?
- Describe the emotions connected with not moving forward?
- What can hurt you and how can you plan to minimize the damage?
- What is the worst and best case scenarios?
“The person who risks nothing, does nothing, has nothing, is nothing, and becomes nothing. He may avoid suffering and sorrow, but he simply cannot learn and feel and change and grow and love and live.” Leo F. Buscaglia
Risk Tolerance Assessment
Breashears, D. (2012, June 29). Marketplace. (K. Ryssdal, Interviewer)