Risk is Not Purely Bad

 Risk is Not Purely Bad

        The risk just can’t be viewed as a negative. If the risk is just a negative the way should respond to risk is by avoiding it. So the best risk management strategies would be risk avoidance strategies. And that’s not a way to invest or build a business. In fact, if you look at great businesses and you think about how they became great not by avoiding risk but by seeking out risk. Not seeking out every risk but seeking out the right kind of risk. to me, that’s the essence of risk management to understand that risk is both positive and negative, and good risk-taking is you’re weighing the trade-off and you are taking those risks where the good outweighs the bad. No guarantees, but that’s the essence of risk-taking.

         As human beings, we’re risk averse. People became more experts the more expertise they had and the less risk-averse they became. Take the example of some traders out there. Traders as they trade longer and longer become less risk averse because they either learn more about the market or worse they think they’ve learned more about the market. Another example is young versus old people. Young people are less risk-averse than older people. People are more willing to take big risky bets with other people’s money than with their own money. That’s something that comes from within. If you come into a casino and I handed you 50,000$ at the door even though it’s now your money the fact that I handed you the money rather than it being money that you earned makes a difference in how you bet with that money.

        And finally here’s the interesting point, when people lose money on bets or when they lose money in casinos it looks like they get less risk averse and try to get back to break even. In other words, they start taking bigger and bigger risks just to get back to breakeven. It’s something that every casino knows but something to keep in mind. These are things that go against classic economics in terms of risk aversion but this is what behavioral finances brought to the table. Recognizing risk will helps you to understand why people behave the way they do. And sometimes why they behave strangely.