Have you ever thought about what type of risk taker you are? Are you the one that does bungee jumping or enjoys climbing rocks others would be afraid to fall off? Do you avoid taking passengers in your car because you might be liable for them in an accident? Do you dream about going all in into your start-up after college, or do you prefer the security of a 20-year commitment with the military or your local city that guarantees a lifelong pension and healthcare?
Many Decisions Reflect Your Attitude Towards Risk
I don’t know about you but when I started out my career, I had a hard time deciding what direction to take. Even deciding what to major in was difficult initially. How would I be capable of earning enough to live well? What were the chances that things would not work out?
The first thing I realized was that my colleagues and I differed in more than looks, behavior, attitude, interest in subject matters, and financial means (or lack thereof). We also differed in how we saw the world and how many risks we could take on. We did not talk about risk explicitly; it was implicit in discussions of life and life strategies.
There is no point in planning your start-up at college if you cannot sleep at night because of lack of income. When thinking about the love of your life, would you require a pre-nuptial? Where do you put your savings – leave them to rot in low-yielding checking accounts like many Germans do because they perceive the stock market as being too risky? Or do you put all your money into the FAANGs to either become filthy rich or go broke in the next high-tech recession?
I could go on, but you can see already that personal comfort level and perception of risk might determine many decisions in your life. For that reason, getting clarity on what type of risk taker you are and what rewards you consider worth giving up sleeping tight, helps you throughout life.
Let’s look at some archetypes.
Going All In
You know the story well. You see the smiling 26-year-old CEO on CNBC. He talks about how he maxed out his personal credit to fund the now-unicorn start-up. His implicit advice is: just do it, bet the proverbial farm. More importantly, you cannot even think of winning big in life without betting and giving it all.
Well, you don’t see all the entrepreneurs on TV that did exactly that but went bankrupt? Maybe they now have less faith in the often-mentioned “fail often, fail fast” mantra than before. They are broke and living off food stamps.
Where do you stand? Look back in your life and see whether you have been a daring “going all in” type or not. Don’t try to mirror somebody on TV or your best buddy, somebody that you are not. But if you are, all the power to you. The world needs crazy daredevils that often propel mankind forward.
The Prepper in a Bunker
There is nothing wrong with being a worry-wart. You avoid doing anything that could harm you physically, financially, or mentally. In a nutshell, you just don’t take any risks. Period. You are aware that you might limit your upside. For example, you are happy working for your company until retirement. Yes, you potentially could move to a competitor and make more much more money or have more responsibility – such a move would be too risky, though. What if it did not work out?
Another example: you buy a house in a safe neighborhood even if putting money down in up-and-coming Downtown would potentially yield more over the next 10 years. With regard to your love life, you only date somebody from your own ethnicity, religion, and state. For you, it is important to avoid any cultural risks that would come with a partner from afar.
Moreover, your supplies are well-stocked, be it for electrical black-outs or earthquakes. Maybe you have read some books on prepping. Finally, all your belongings are fully insured, and your whole family carries life insurance, disability insurance, and long-term care insurance. While you cannot afford eating out anymore because of all the expenditures for protection, you are content because you feel safe.
The Occasional Better
Then there is the middle ground. Here, a person takes calculated risks, both to capture a potential upside and to protect against the most dangerous downside.
Here are some examples: After college, you seek out a company with a brand name first. You stay there for five years. This time period might be enough to vest you in the company’s retirement plan. Also, your long tenure demonstrates to future employers that you are a dependable employee. Now, after at least five years, if you see an opportunity, you risk more by joining a start-up. The good news is that this is a very calculated risk in a growth option as you can always go back to Corporate America in case of failure. Very different from some of your peers who don’t have same employment history. As an Occasional Better, you are selective in when, how, and how much to bet without risking it all.
The Prudent Defender
What about the downside? Maybe no need to buy every insurance that is out there, but protecting you from unlimited downside risk is prudent. If $150 a year can get you renter’s insurance, isn’t that money better spent than on the latest restaurant experience? If you plan to have kids and are healthy now, maybe you should buy life insurance because you might not be able to acquire it later after health issues have emerged. When protecting your butt, you don’t buy insurance for every single risk; you just focus on the large risks in life. In other words, you are a Prudent Defender, selecting where to spend money on protection. With this mindset, you should also become more alert to potential risks when you see them. Over time, you will get better at either rejecting risks, mitigating them, or insuring against them.
It is very helpful to know where you fall in terms of accepting risk. Are you on one of the extreme ends, or somewhere in the middle? Either way, once you are aware of your acceptance of risk, you have a yardstick. It will guide you with all decisions in life.
© Michael Froehls – 2019 – All Rights Reserved