"Don’t fake it ‘til you make it. Fake it ‘til you become."
- Amy Cuddy
Risk aversion, at its core, is the reason humans have survived as a species.
We’ve evolved to be wary of risk. We evaluate and consider, and put safety before everything else. It’s a good strategy, evolution-wise.
But risk aversion may be stopping you from achieving bigger things. Tyler Tervooren, founder of Riskology.co, says, “Most people, given the choice, will choose unhappiness over uncertainty, unless presented with a compelling reason to do otherwise.” I see this all of the time. People avoid investing in their own futures, because risk aversion makes them shut down. They ultimately miss out on amazing opportunities.
Making an investment decision activates your brain’s risk centres, and triggers a fight-or-flight response. This doesn’t mean you give in, and skip the investment. Instead, you can use that information to make smarter investment decisions.
Risk vs. Uncertainty
A risk is something unknown, but that also has some measurable probability of outcome. Uncertainty, on the other hand, is an unknown with no measurable probability. They’re similar - but not the same.
Essentially, you can calculate some level of risk in almost all situations. The rest is uncertainty. Unless you can tell the future.
Take a lottery ticket, for example. You can calculate the expected value of a single lottery ticket, based on the odds of it winning and the prize if it does.
A two-dollar Powerball ticket has a negative expected value when the jackpot is under $277-million-ish. So, you can expect to lose money when you play. Although you probably already knew that.
You don’t need to worry about math to take good risks. But it’s good to know that risk is a quantifiable, probability-based factor that you can apply to your decision making.
Risk vs. Genetics
Surprise! Genetics determine your level of risk comfort. Geneticists have identified DRD4 as “the novelty gene”, which is closely tied to thrill-seeking and addiction behaviours. It hangs out with all your other personality traits on chromosome 11, and it manages your general risk tendencies.
Still, don’t be too upset if you think your genetics have left you prone to take the safe road. A 1995 study of just under a hundred entrepreneurs found that most entrepreneurs didn’t think of themselves as natural risk-takers. They just see risk differently than the control group (and probably everyone else).
These entrepreneurs “[perceived] more strengths than weaknesses, more opportunities than threats, and more potential for improvement than for deterioration.” Instead of seeing threats and running in the opposite direction, entrepreneurs see how they can turn a situation into a positive opportunities, and then they proactively work it in their favour.
So risk-taking is a cognitive trait, as well as a genetic factor. This means it’s a learned skill that we can practice!
Risk vs. Your Brain
Decision-making in situations that involve risk light up a number of areas in your brain. Studies have shown that the frontal cortex, the insula, the anterior cortex, and the parietal cortex are all responsible, to some degree, for decision-making.
It’s a bunch of gibberish if you’re not a neuroscientist. The interesting part lies in how each area activates. When you select a risky option, your insula activates more than when you choose a safe option. This is impacted by punishment (or negative consequences). Study participants who lost points as a result of a risky decision showed more insula activation, and choose safer options, later on.
It may seem obvious, but it shows that you can hack your own brain to make smarter decisions in the face of risk, rather than letting risk determine your decisions.
Are You a Risk-Taker?
Some people are shut down from risk-aversion. I can tell you I used to be one of them.
Imagine that you’re faced with the following choices.
In your first decision, you must choose between:
A. A sure gain of $240.
B. A 25% chance to gain $1000 and a 75% chance to gain nothing.
In the second decision, you must choose between:
C. A sure loss of $750.
D. A 75% chance to lose $1000, and a 25% chance to lose nothing.
Most people choose A and D. They pick the safer option when looking to gain something, but take a risk when they’re expecting to lose. This is a common way risk brain affects decision making.
It looks like it makes sense. But if you chose A and D, then you opted for a 25% chance to gain $240 and a 75% chance to lose $760.
If, instead, you had chosen B and C, you would have opted for a 25% chance to gain $250 and a 75% chance to lose $750.
B and C are, objectively, the better decisions.
This isn’t a personality test. It’s just an interesting example of your risk brain in action - and how it can cause you to make poor decisions.
Did you choose A and D? Let me know in the comments!
How to Take More Risks
There are a number of things you can do to practice more risk-taking. Here’s a short, scientifically-backed list:
Hang out in a group (herds take more risks)
Eat more turkey (tryptophan increases risk-taking behaviours)
Avoid MAO-inhibitors (MAOs increase rates of safe choice-making)
Try sleep deprivation (best idea ever!)
But these are all very silly ideas.
The problem with a blanket “take more risks!” approach is that you may not be taking good, smart risks. You may be choosing terrible places to ignore your risk brain, like texting and driving. Or not checking how hot your tap water is before you put your hands under.
Instead, approach risk the way entrepreneurs do.
Have you heard of a “minimum viable product”? It’s a concept in business development where, as an inventor or product developer, you do the least amount of work to get your product to market.
Say you’re building an e-commerce website that sells owl-themed tchotchkes. You can spend a year developing a site with full integration into Paypal, credit cards, mail-order cheques, and digital invoices, with ten thousand products from unique retailers from around the world.
When you launch, you’re about $20,000 in the hole. Or more.
Conversely, you can set up a Shopify account in a day and start selling a few owl-themed mugs and iron-on t-shirts that you make in your basement. You can immediately gauge consumer interest through purchases or just shop visits.
You might find that nobody is interested in owls anymore. But then again, you might start seeing some traction, because owls are timeless. But this way, the minimum viable business way, is much cheaper and faster. The result? A smarter risk.
Then analyze, adjust, and do it again!
This is a strategy that successful risk-takers use. They don’t avoid doing risky things - like investing in a condo - they just do it smarter.
Pre-construction condos are a great example of minimum viable risk when it comes to investing in real estate. Here’s why:
You pay very little money up front, just portions of a down payment, at different times during the condo’s construction. This means that your money isn’t actually as tied up as most people think. Then, when it’s completed, you find a tenant and they pay the remaining 80% of the mortgage. They pay for your equity, you have an asset you paid 1/5th of the price for, and you can offload in an emergency.
The only “investment” is that initial down payment. Even then, you get to hold onto that money longer than if you had purchased a freehold (hello, cash flow!) Then you build an asset, slowly but surely.
Then review and adjust. Are you charging enough? Are you covering all of your costs? Are you making a little something every month? Great! Save up and do it again.
Practice risk-taking by starting small. Then evaluate, adjust, or move on.
Here are some great places to start:
Instead of investing $10,000 into a stock portfolio, try putting $100 into an online portfolio manager like WealthSimple. Play around to see if the system, and self-management portion, is for you. If it’s not, well, you’re not out $10,000. Then try something else.
Diversify and mitigate your risk by spreading your investments out. Put money into housing, stocks, savings accounts, hedge funds, money market accounts, and/or mutual funds. If you find one to be better than the others, do it more!
Buy low, sell high, at the same time. That way you lock in the difference in price between an asset immediately, without offloading the asset (ish). Example: condos. If you own an investment condo, buy a different pre-construction condo in a viable neighbourhood, and sell the first one. The new, pre-construction condo will be significantly cheaper than what the buyer pays for the one you already own. You still own an investment condo, you’ve just made the difference in buying price and selling price of the asset.
Whatever you do, keep trying. Risk-taking is learned. Practice stay persistent, and train your brain to be okay with taking risks.