This article is an unedited excerpt from my book project, which aims to help people better understand risk in order to overcome their fears.

If you want to make friends with risk, you’ll need to be prepared to do some research. While this might sound like a lot of hard work, do you really want to be making decisions that will affect the rest of your life based on anecdotes, “guestimates”, or worst of all – not being bothered to ask a few questions?

Knowledge plays an important part in our risk appetite because the more we know about a particular scenario, the better equipped we are to make a choice that is in line with our values – a choice that is right for us. When we lack knowledge, we fall back on the other elements of our risk appetite which, while important, don’t give us the full picture.

Let’s consider the example of a woman I met who told me about how she was making money trading currencies. At first, I was astonished (and to be honest, thought she was a little crazy) but as I listened to her, I came to understand that she had spent a LOT of time researching it, and had started experimenting with small investments that worked up to bigger ones. She knew that she would lose money on a lot of her investments, and knew the ratio of win:lose that she needed to maintain to continue to grow.

I started to think about whether this was something I would ever try – it sounded so simple and logical when she was explaining it. But I quickly realized that there was no way I could maintain interest for long enough to learn everything she had learned – the subject matter just wasn’t interesting enough to me.

This raises another important point, one that often comes up with my coaching clients. If you are trying to make a decision using risk assessment as one of your tools, and you can’t even be bothered investing the time to properly understand the risks, the writing is on the wall that you’re just not that interested (unless it’s such a no-brainer that you decide not to use risk assessment as a tool – but that can be risky!).

The important thing to remember is that the more you know, the more able you are to make a choice that reflects who you really are, rather than falling back on assumptions and established patterns of behavior (and risk appetite) that may or may not serve you. Whether you’re super risk-averse or the world’s biggest daredevil, arming yourself with the facts helps you do what’s right for you.

But how much research is too much? Paralysis by analysis is another common trap – and quite frankly an excuse – for people who don’t want to accept the responsibility for making a decision. We start to understand how much research is appropriate in our assessment of risks when we understand exactly what it is we’re researching. It comes back to the three fundamental elements of risk (for a more detailed explanation of these three elements, see my earlier article):

Scenarios

What could go wrong? The important thing here is to think broadly, without getting carried away catastrophizing. Consider this to be a brainstorming activity, where you write down all the things that come to mind but don’t explore any of them in detail (yet!). When you’ve exhausted your imagination, if you think there might be some things missing then go online or ask people you know who have been through similar experiences for their thoughts.

Consequence

Just how bad could the outcome be? Again, it can be a fine line between considering consequences and catastrophizing, so make sure that the consequences you’re imagining aren’t completely detached from reality. A second opinion is a great way to test this, and can also help you think of scenarios you may not have considered.

Likelihood

If you were to be completely honest with yourself, how likely is it that the consequence you’re considering will actually happen? A risk assessment template will break this down into categories, based on the availability and frequency of evidence to support it. Considering the evidence that is available to support the likelihood of something happening is an important part of the process. If you can imagine something going wrong, but can’t find a reference to it having gone wrong even with the power of the internet, you’re probably bordering on catastrophizing. It doesn’t mean you have to discount the possibility completely, but you should be realistic when assigning a likelihood.

 

If you spend some time assessing these elements objectively, doing enough research to satisfy yourself (and perhaps an objective friend) that what you are proposing is realistic, then you have a really solid foundation for making a decision about whether you are willing to accept the risks associated with a certain course of action.

This begs the question – if we have sufficient information available to us to make an informed choice, shouldn’t any decision involving risk be easy? We just follow a formula and arrive at the answer. And not just any answer, but the “right” answer! Well, that’s a lovely idea… but we are human, after all.

Once we understand our values and have done enough research to have the objective pieces of risk in place, other personal factors come into play in defining our personal risk appetite. Namely, our stage of life and self belief. I will go into more detail on these factors in the coming weeks!

 

How much effort do you put into understanding the three elements of risk when you’re making a decision? Do you think it’s enough?

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