How to Think about Risk
Acknowledge the role of risk in every decision you make.
A coin is flipped into the air.
There’s 50% chance it will land on heads; 50% chance it will land on tails.
The distribution of outcomes looks like this:
.....luck......|.....risk......
So you pick a side as it falls back down.
Get it right and you win.
This is luck.
Get it wrong and you lose.
That is risk.
No situation in life is as simple as a coin toss but the principle is the same.
On the opposite side of luck is risk
For every decision we make, we draw a line between the outcomes we want to happen and those we want to avoid.
The outcomes we desire, we call winning, success and achievement.
All the other outcomes—the ones we don't want—we call losing, failure and mistakes.
In various life situations, the split between luck and risk can look like this:
..........luck........|..risk..
and it can look like this:
..luck..|.......risk...........
The point is, luck and risk always lie on opposite sides of each other. You cannot have one without the other.
This means risk is present in every decision you make, no matter how 'safe' that decision actually feels.
Pursue a 'safe' career.
Invest in a 'safe' asset.
Settle for a 'safe' relationship.
There are varying degrees of risk involved in all of those.
Nothing is 100% guaranteed.
Ever.
Think in terms of probabilities
No decision is ever entirely safe or risky, right or wrong, good or bad.
A more nuanced approach is to explore the varying degrees of probability each outcome has of occurring.
Asking 'how safe is it?' is more useful than asking 'is it safe?'; it implies an acknowledgement of the hidden side of risk.
Getting absolute numbers is not needed—even approximations offer invaluable insights.
For example, what is the probability that I'll hit the bullseye?
More than 80%?
About 50%?
Less than 20%?
Depending on what the answer is, my willingness to bet on the outcome will be drastically different.
Risk is relative, and that's okay
That doesn't mean there is an objectively correct answer though.
The probability that feels safe/right/good for me to bet on might feel risky/wrong/bad to you.
Our tolerance for risk is highly personal.
If I were brought up during a bust period, my attitude to risk would be completely different than were I were brought up during a boom period.
Similarly, your attitude to risk would be different with $100 in the bank versus $1,000,000.
The point is, don't ever let someone tell you what is too risky—you have to come to your own conclusions on that.
What’s important is that your decision sits right with you.
Takeaways
Every single decision comes with a certain degree of risk.
Ball-park the probability of both experiencing luck or risk.
Ask yourself if you—and you alone—are comfortable with making a decision based on that split.
Then let fate unfold and see on which side you will fall.
Good luck.