How to Think About Risk


"Some see risk as a reason not to try. Some see it as an obstacle to overcome. The risk is the same, to try or not depends on your perspective."


-Simon Sinek


I'm sound asleep when the annoying sound of the alarm clock starts blaring. It's 6:30 a.m., and I'm not used to getting up this early, even when I'm not on vacation in Las Vegas. It's even worse, though, because I just went to bed 5 hours ago, and my head hurts.


I was out too late with some people that I met on a recent rafting trip. I didn't mean to stay out this late, but the conversation (and wine) was flowing, and there are no clocks inside casinos.


This morning I have to try to catch a bus to get to Tropicana by 7 a.m. I'm going skydiving, and when I signed up for it, 7 a.m. seemed like a perfectly reasonable time.


I finally get to where I'm supposed to be and find that many other people are already here. I strike up a conversation with a person I’ll call Karl. Karl is from Costa Rica, and this is his first time in Las Vegas; we have that in common. Karl is also on a solo trip; another thing we have in common.


When we meet one of our guides, we are handed waivers to sign. As you can imagine, the waiver is quite long, given that this is for skydiving. I start going through the waiver, reading about all the ways that I can be injured or killed, initialing each page as I go through.


I look over at Karl and see him flipping through the pages as quickly as possible, scribbling on every page. Jokingly, I have some if he's going to read what he is signing.


He tells me, "no. I really want to skydive, they don't let you go unless you sign, and I don't want to know what it says because then I might not sign."


risk is the chance that something bad will happen

Definition of Risk


Everybody has heard of risk. But if I asked you, you might struggle to define it. Risk is effectively the idea that something bad can happen. In other words, when you go about your life, you have some expectation in your mind about how it will go. Our minds do a great job of helping us envision what might happen in the future.


risk is what's left over when you  think you've thought of everything else

When that vision of what might happen in the future turns out to be worse than we expected or worse than we hoped for, we call that risk.


For example, you might envision walking to your mailbox to get the mail, but you then slip on the ice. You might envision driving home from work but get in a collision. You might envision feeling good after going on a run but sprain your ankle. Or, you could envision getting a 7% return on your investments but only get 2%. These are all examples of risk; things not working out the way you hoped.


There are two dimensions of risk to consider; likelihood and consequence.


risk is what's left over when you think you've thought of everything else

Likelihood of Risk


The first element of risk is how likely it is to show up. In other words, what's the probability that something bad will happen? If it's highly likely that something bad will happen, that's riskier. If it's highly unlikely that something bad will happen, we call that less risky.


risk includes how likelihood something bad will happen

For example, imagine standing on a cliff. If you are far away from the edge of that cliff, then it's a pretty low likelihood that you will fall off.


if it's less likely, it's less risky

On the other hand, if you're standing right on the edge, it is far more likely that you will fall off.


if it's more likely, it's more risky

Consequences of Risk


The second dimension of risk is the consequence of that risk. In other words, if you assume that the risk shows up (no matter what the probability was), what will happen? Sometimes it's not as bad as you think, but other times it's worse than you imagined. If the consequences are tolerable, then that would be considered less risky. If the consequences of the risk showing up are dangerous, that's riskier.


risk includes what the consequences are if it shows up

Let's use our cliff example again. If we assume that I fall off of the cliff, but it's only three feet high, then those are tolerable consequences, and I would consider that to be less risky.


the more tolerable the consequences are, the less risky it is