Risk Arc's and Regret minimization
As humans, we fear taking risks not because we fear the outcome but because we fear the unknown. We stop ourselves with the question “Can I do this?”. What if, instead, we turned the question around?
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“There's nowhere to run, nowhere to hide fear is a monster, no end in sight” - “Don't Cry by Naked”
TL;DR: As humans, we fear taking risks not because we fear the outcome but because we fear the unknown. We stop ourselves with the question “Can I do this?”. What if, instead, we turned the question on its head “Why do I think I can’t do this?” with a follow-up of “What is the worst that could happen if I do this?” This does not mean that you take dumb risks but you take calculated risks based on your risk arc. Your risk arc is two questions plotted. “Will this ruin me?”, “Will I regret this later on in life if I don’t do it”? The idea is to find your balance at the outer edge of this risk arc.
In 1979 Daniel Kahneman and Amos Tversky proposed the Prospect Theory. The Theory states that for us humans, losses cause a greater emotional impact than an equivalent gain. For example, the pain of losing $10 outweighs the pleasure of winning $10. This fear causes us to live suboptimal lives.
I know this because these very fears have resulted in me living a suboptimal life for years.
For example, I'm confident that I'd be way ahead in my career had I done my MBA a decade earlier. I vividly remember my first MBA class, the faces, the joy on each of my lovely classmates' faces. I felt relieved. Relieved that I am finally here. And then regret…Regret that I didn’t do this in my 20s because I was scared of taking on student loans.
In my personal life, my ex-wife and I would both have been better off had we called it quits years earlier. We spent too many years trying to make something broken work. I wasted 12 fucking years of my life all because I was too scared, too fearful of “divorce.” And sure it was painful But now that I am on the other side of it I feel much happier.
On the flip side, the times I've taken risks have tended to turn out well. For example, I bought a small condo in Sunnyvale, CA back in 2008 when others were scared that home prices would continue to drop. Turns out, I caught the bottom of the market and waltzed into a life-changing investment.
Another was joining LinkedIn when it was a small company; I was stuck in a dead-end job at Oracle going nowhere with absolutely pathetic pay and way too much work. A senior executive at Oracle told me, "Sorry bud, this is what we pay. Take it or leave it." So I left the stability for a company that at the time seemed to offer none of that. This allowed me to realize how much time I had wasted at Oracle and was never going to do that again.
Over the years, taking risks has made me happier. I do but having these regrets means that I actually took some form of risk. Some of them worked and some didn't but I am no longer afraid of taking a risk. These regrets are learning experiences that can’t be turned around but they help me optimize my risk arc (ie how much risk can I really take without it impacting me?) Needless to say, I didn’t take uncalculated risks. I evaluate every opportunity to ensure that the risk will not ruin me in some way - financially, healthwise, or something else.
Here is how I now make decisions about risk both from my learnings from risks I took and from those I didn't
Identifying your own Risk Tolerance
“Risk tolerance is the ability and willingness to stomach a decline in the value of investments. When trying to determine risk tolerance, ask how comfortable you will feel maintaining your positions when the stock market is experiencing large declines”
Applying that to our lives, one’s risk tolerance should be defined as “the ability and willingness to live at the edge of your comfort zone while continuously expanding the risks you can take.
Each of us has very different risk tolerances based on a multitude of factors such as culture, upbringing, education, wealth, and family. One of the key ways to identify your own risk tolerance is to dig deeper into what haunts you? What are some things that you should have done but didn’t because the known appeared to be better than the unknown? Perhaps it was a job? A relationship? A place you wanted to visit? Once you have a list of risks you did not take, consider what you think the most likely outcome would have been? Why did you think that was the most likely outcome? Hindsight is always 20/20 and this will help you identify what is stopping you from reaching your potential. In my case, for example, last year I left my job at a larger company to join a start that hadn’t fully figured out product-market fit. The worst outcome is that we wouldn’t and I’d have to go back and start as an IC (Individual Contributor) Product Manager at a larger company. That seemed like a risk worth taking and now that I’ve joined a pre-product market fit startup this doesn’t seem as scary and I am considering starting something of my own!
Drawing out your Risk Arc
I define the Risk Arc as two questions plotted on a graph
“Will this ruin me”?
“Will I regret this later on in life if I don’t do it”?
(Excuse my poor quality artwork, working on it … :))
Strive for being at the outer edge of your Risk Arc and continue moving up the curve; you’ll soon realize how resilient you actually are and that things won’t ruin you! In my case, I survived the experience of joining a pre-product market fit startup and it has helped position me to take an even larger risk (such as starting a company of my own)
My own experience with fear and the Risk Arc
It's scary to openly admit this as a successful professional, but as I move up my own Risk Arc, I realize it's perfectly normal to be vulnerable. I have always been fearful and hesitant, even about basic things. Larger risks were completely unfathomable. I would even avoid trying a new restaurant out of fear that I...wouldn't like it.
This changed for me over a decade ago and it still haunts me. In Business School I faced situations that I was not naturally comfortable with. International trips, speaking in public, networking events, meeting new people, and having conversations. But I soon realized that they were easy things! Getting pushed out of my comfort zone helped me grow as a person. In fact, people now think I'm an extrovert because of how confident I am to strike up a conversation with a stranger.
Ultimately, I feared the unknown only because it was unknown, and not because it was particularly scary
Losing that fear helped me switch careers from Engineering to Product – despite taking a 75% pay cut to do so. I asked myself “What is the worst that could happen?” and since the worst scenario wasn't destitution, I decided to take the risk.
External and Internal stimuli
As human beings, we sometimes need a nudge in the right direction and for many people, Covid-19 was just that. Such externally imposed crises are a huge vehicle for growth because we’re forced to contend with the status quo or ask the question: “What is the worst that could happen”?
This makes one realize that it's okay to go up the risk arc. Millions of people are now part of the creator economy and the great resignation, leaving their full-time, secure jobs and considering working for themselves and taking a risk.
Today, I find myself at the crossroads again, deeply questioning what I want from the next decade of my life. Do I want to stay in a full-time job? take a long-earned break after 20+ years of working? or just do something drastically In The 5 greatest regrets of dying one of the biggest regrets of dying people is “I wish I'd had the courage to live a life true to myself, not the life others expected of me”
I, for one, definitely don’t want to live a life that others expect of me, Trying to optimize for life is hard but on the last day of your life when you look back would you rather have millions in the bank, with no great memories of a life well-lived? Or zero dollars in your bank with millions of memories because you stepped out of your comfort zone? The old me would have chosen the former, but the present-day me prefers the latter. I’ll leave you with a quote from Nelson Mandela, that has had a huge impact on me: “There is no passion to be found playing small – in settling for a life that is less than the one you are capable of living”
I urge you to find your courage. I urge you to live a fuller and more enriching life, one that you are capable of. Your future self will thank you
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