How Risk-Aversion Is Hurting Your Finances
What makes some people risk-averse versus risk-takers?
The preference for risk-aversion occurs in those who choose sure outcomes versus a gamble even if the expected value of the gamble is equal to or higher.
On the other side of the spectrum are those with higher risk preferences who would choose to gamble for an outcome of lower or equal expected value compared to the sure outcome.
As humans, we are able to gage potential risks in an effort to keep us safe. This ability is what kept us safe years ago from harmful predators. However, this primal brain wired response can end up getting in our way and harming us more than protecting us.
For example, someone with high anxiety who is constantly worried and anticipating the worst will limit their lives in ways that can keep them from having certain jobs or going to certain places. At first these limits will lead them to feel relief but over time they will feel worse as they realize their ability to feel joy or happiness is restricted.
Not only does risk-aversion influence the kind of career opportunities they seek or places they might travel to, it will also influence the kinds of people they choose as partners or even the ability to trust their partner. The risk of loss can be too great and can keep people in unhealthy relationships or in constant doubt even when in healthy relationships.
The fact is happy people take risks beyond the level of comfort. They remain curious in search of more, not in doing more of the same.
According to a 2007 study in Colorado, participants who reported feeling curious engaged in more activities that made them feel happier and thus reported feeling the most satisfied with their life.
Therefore, in order to feel truly happy and satisfied, we must push against our comfort zone and be vulnerable to the discomfort.
“For most people, the fear of losing $100 is more intense than the hope of gaining $150”
People who are risk-averse may have difficulty making decisions and making commitments in various areas of their lives. These decisions may be as small as deciding what to eat from a menu to deciding on a career.
Financially, they may be more likely to choose conservative investments over high-yielding investments with higher risks.
One interesting study showed differences in driving, with drivers who are risk-averse being less likely to speed and requiring larger gaps to feel more comfortable merging lanes.
Some studies have shown that risk-aversion increases with age and with higher economic risk.
Risk-aversion may also vary according to domain such that someone who takes risks in their physical activities may be risk-averse in their investments.
However, even risk-aversive decisions that people feel will keep them safe in their comfort zone also hold risks. Oftentimes, these risks may be even riskier than the lesser known options. Consider for example individuals who may stay in their jobs in fear of the uncertainty other jobs may provide, only to then be laid off later on.
"The only thing that is constant is change itself."
Even the status quo has hidden risks and sometimes not taking action is riskier.
Tips to Conquer Risk-Aversion
Reframe risk as an opportunity to succeed rather than a path to failure.
Take smaller risks and increase your risk tolerance.
Evaluate any possible hidden risks when considering big decisions, especially in the direction you perceive to be the safest.
Consider the worst-case scenario of all options. What is the biggest loss of the highest-risk? What is the probability of this scenario occurring?
Mitigate risks by researching, talking to others and seeking help from mentors or experts.
Consider the potential of internal growth. Most of our learning comes from taking risks.
Accept the discomfort in uncertainty to take risks. Otherwise, consider how the alternative of not taking risks will affect your life, your future, and ultimately your happiness. Rarely, if ever, do people look back on their lives and wish they had taken less risks.
Recognize failure not as the end of the journey but as the beginning.
“Fear is not the opposite of success but a stepping stone to success”