To explain the psychology of risk, I asked my college students yesterday to commit an hypothetical investment of $10,000, to either: an opportunity with a 5% probability of turning into $100,000, or one with an 80% chance of turning into $20,000. They could keep the difference, but had to give back the original $10,000.
The choice I gave them was between a profoundly risky situation with a spectacular result, and one that carries a lot less risk but yields a less impressive return. If you flip it around and look at the risk side of the equation, they were weighing a 95% chance vs. a 20% chance of losing the initial $10,000.
In real life, we do this all the time. We choose between getting less than 1% interest on our savings with no risk to the principal and the possibility of earning five or ten times that annually in the stock market, the latter carrying the risk of losing our initial investment. We choose between taking the faster route to our destination on the interstate, with the likelihood (but not certainty on a busy weekend) we’ll get there faster, even knowing that taking the scenic route is more interesting and offers the chance of getting happily, temporarily lost. We choose a mate who might be easier to get along with over the firecracker who will drive us crazy (in both a good and bad way).
One of my students astutely observed that it’s where you are in life that determines the value and the meaning of the reward, because it directly influences how much risk we’re willing to tolerate. When I said they’d have to put up their own money, everyone was solidly in the 80% risk camp, but the same smart kid suggested this was because they are students and $10,000 is a lot of money at this point in their lives…and noted further that investors with a lot of money probably don’t see the world the same way. When I changed the equation to the possibility of getting a million dollars out of an initial investment of $100,000, several students moved over from the classes’ prior, unanimous decision to take the lower risk option.
There’s endless advice out there about following “the road not taken,” but you’ve got to factor in this matter of where you are in your life. Most of us, most often take the safer route, but (as Frost suggests in the poem that originated the phrase) we do it at a cost. The “safe” savings account at the bank pays so little interest it actually loses money to inflation. The “safe” corporate career path runs into the brick wall of “downsizing.” The “safe” interstate route misses all the peculiar, amazing sights and people we’d encounter along the byways. The “safe” relationship gets pretty dull over time.
As an inveterate glass-half-empty guy, I’d like to endorse another famous dictum, eloquently expressed by Adam Grant that “our biggest regrets are not our actions but our inactions – the chances not taken.” In other words, we are more likely to regret the harder/scarier things we did not try than the easier things we did. Previous generations, including I think boomers, bought into the idea of a traditional and linear progression: from high school to college to career, from infatuation to engagement to marriage to children, from your parent’s house to a crappy shared apartment to renting or buying your own place.
Have a look at any given group of millenials: this no longer computes, the sequence is all over the place. Kids first marriage later, group hang outs instead of steady dates, renting or boomeranging back home instead of taking on a mortgage, building a career with a single employer to a half dozen jobs before age 30. I don’t know if this is about a fundamental shift in the culture or individual risk tolerance, but it is different. Ask a roomful of college business students who wants to start their own business and it’s most of them. Ask the same room who wants to pay their dues on the road to the success and personal satisfaction of owning that business and it’s virtually none of them. They don’t and won’t necessarily process this as risk tolerance so much as about impatience to achieve their birthright. But I’d suggest it has an awful lot to do with wanting to upend the traditional equation and separate risk from reward.
Elon Musk, the guy who used his gigantic windfall from PayPal to start Tesla and Space-X and is now pursuing the possibly crazy concept of hyperloop transportation, is at the extreme end of the risk-taking spectrum. He’s the ultimate entrepreneur, willing – no compelled – to risk it all because of the absolute surety that he can accomplish anything by force of will.
Most of us live at the quieter end of the spectrum, where we have a certain tolerance for taking chances, but once we’ve achieve security in our finances or career or relationships, prefer if given the choice to remain on the same path. I know a guy who turned down a job offer that carried a $30,000 increase in salary for reasons known only to him, but which I suspect had to do with the perceived risk of stepping outside the familiar.
I’m the last one to think you can do much about human nature in general, or about personal predisposition in particular. We are what we are, and change, if it occurs tends to be evolutionary rather than sudden. Most of the time I’m a lot less intense than I used to be, but push the right button and I’m rapidly, if less persistently the same impatient guy who demands destiny bends to his will rather than the other way around.
I used to be a change junkie, and while change continues to stimulate my synapses, I’m troubled about a creeping resistance that is actually a reversion to childhood form. I like new experiences but have to overcome the hump – for example, I’ve wanted to travel “down under” for a long time but tempered the impulse by thinking about 22+ hours on a plane, even if it is decorated with koala bears. I hate the occasional squabbles of any long-term relationship but know the true center from my underlying feelings and understand that I need to be with someone wicked smart and challenging.
So what and where is the right balance? There’s no generalizable answer, but I know this and return to it as an axiom to live by: I once knew a smart and accomplished woman who lived well, traveled the world, stepped into and ran a business with no formal training, and had in her forties a succession of successful and interesting suitors. Whatever it was, maybe just too much angst, maybe that encroaching resistance to change, maybe just a desire for some domestic calm, she ultimately remarried, to someone whose inability to deal with the world ultimately reduced her world to four walls of an apartment. It cost her everything to accommodate him, and while it affected other people that was her choice to make. But to my mind it was a bad one and it is my reference point when I feel I’m becoming too still to do something. There’s no perfect balance point for risk and reward, but we probably all have a variety of object lessons in what not to do. Those lessons have provided me with a roadmap, and it’s served me pretty well in having the kind of life I wanted.