Understanding Our Fear of Risk

When we encounter the term "taking a risk," what emotions or thoughts come to mind?

Most likely, we associate it with discomfort or negativity, feelings that resonate physically within us. For many, the word "risk" conjures images of:

• Danger
• Harm
• Recklessness
• Ignorance

In essence, we tend to perceive risks as unfavorable. But why do we hold this viewpoint? Enter Prospect Theory.

This influential concept, introduced by Nobel laureates Daniel Kahneman and Amos Tversky in 1979, sheds light on our aversion to loss. An illustration from DreamEndState further clarifies this theory, emphasizing the significance of "loss aversion."

Loss aversion refers to our tendency to prefer a small, certain gain over a larger, uncertain one. A comprehensive study conducted in 2020 by Kai Ruggeri, an assistant professor of health policy and management, confirmed the findings of the original 1979 study on a broader scale. This research involved participants from diverse backgrounds, providing a more universal perspective on prospect theory.

In this study, respondents were presented with 17 hypothetical scenarios involving potential monetary gains and losses. For instance, if offered $1,000 to play a game, would you choose a 50% chance to double your money or a guaranteed $500? Ultimately, 4,098 individuals who completed all scenarios were included in the analysis.

Key Insights from the Study

The primary takeaway is that individuals are more inclined to take risks when it comes to maximizing gains, yet they hesitate when it comes to minimizing losses. Interestingly, our default preferences can shift based on the sequence of events we experience. Furthermore, we often exaggerate the likelihood and potential impact of improbable events, which significantly influences our decision-making regarding risks.

In high-stress situations, we can become myopic, focusing solely on immediate consequences. Even if a decision offers a potential gain of $200 while posing a risk of losing $100, the emotional weight of the potential loss often overshadows the possible gain.

This becomes even more fascinating when applying the Expected Value formula:

E(x) = Sum of P(x) * value of x

Expected Value reflects the average outcome over time if the action were repeated. For this scenario, with both outcomes having a 50% probability:

E(x) = 0.5 * 200 + 0.5 * (-100) = 100 - 50 = +$50

A rational person would opt for the risk, given the positive Expected Value of $50 over time, even if it feels counterintuitive.

Breaking Free from Loss Aversion

To overcome this fear of loss, consider the following exercise:

1. Grab a pen and paper, or use a spreadsheet like Excel or Google Sheets.
2. Take a deep breath and write down the risky action you're contemplating at the top.
3. On the left side, list the potential risks and the estimated value of potential losses, scoring them on a scale from 1 (minimal pain) to 10 (maximum suffering).
4. On the right side, identify the potential benefits and opportunities associated with taking this action.
5. Repeat this process for the scenario where you decide not to take the action.

Calculate the total values for both the potential benefits and risks of taking the action versus not taking it. If the benefits of taking the action outweigh the risks, then logically, you should proceed. Conversely, if the risks of not acting are greater, then abstaining may be the better choice.

Often, we find that we inflate the perceived negatives of "risky" actions. Additionally, having a backup plan can further reduce anxiety and manage risks effectively—a strategy known as Risk Management.

Personal Reflection

In my own experience, utilizing this exercise alleviated my anxiety and propelled me to pursue my passion for writing on Medium.

I hope this article offers you valuable insights and assists you on your journey to overcoming the fear of risk-taking!

This video, "Watch This If You're Afraid of Taking Risks," explores the underlying fears that keep us from embracing risk and provides strategies to face them head-on.

In "IF You DON'T Take RISKS, You're GUARANTEED to FAIL!" Mark Zuckerberg emphasizes the importance of risk-taking in achieving success and the consequences of playing it too safe.