Business Investing

The Meaning of Risk

A universal definition of risk doesn’t exist. Some of us view risk as negative (what’s my potential downside?) while others view it as positive (what’s my potential upside?). In certain contexts, risk measurement can be very well defined (lending) while in other contexts it’s difficult to measure (investing). As a result of all of this, the term risk is used quite loosely making it difficult to measure and manage, let alone actually identify.

The truth is, we spend inordinate amounts of time thinking about, discussing and attempting to address risk that we fail to understand what I consider to be an important universal truth: the biggest risks we face are generally unthinkable.

Google defines unthinkable as too unlikely or undesirable to be considered a possibility. In other words, we avoid thinking about situations or events that appear to be highly improbable or are uncomfortable to contemplate. By failing to give proper consideration to improbable and/or uncomfortable possible outcomes, we create blind spots that negatively expose us to unexpected shocks and surprises. We’ve all been faced with situations in our lives where we anticipated or ascribed a high probability to what we perceived to be a negative outcome. Leading up to the event, we experienced a lot of heartburn and anxiety only to discover after the fact that the anticipated negative event wasn’t nearly as bad as we imagined it would be. All of the anguish we experienced leading up to the climax served as preparation for the expected negative outcome, which significantly softened the blow we experienced. Note, most of this preparation was likely mental and emotional.

Returning to the unthinkable, if we don’t consider or think about a potential situation or event then how can we properly prepare ourselves for it? Without the resultant anxiety, heartburn and action, we become complacent opening ourselves up to being caught off guard which nobody enjoys.

Seriously contemplating improbable or uncomfortable events not only requires a large dose of courage but it also requires a lot of imagination. Part of the challenge in this process is our innate desire to be accepted by others and to not be viewed as a crazy, tinfoil hat type. To avoid this outcome, we must strike a balance between managing our blind spots and how active we allow our imaginations to run. If we’re honest with ourselves, we come to the realization that we’re unable to specifically identify and be fully prepared for the biggest risks we face. This realization is a form of preparation in and of itself. It leads us to take action to robustly position ourselves for the unexpected whether in our professions, our day-to-day lives or in our investment portfolios.

To refine what I said previously, the biggest risks we face are the limitations we put on the world around us. In other words, our self-imposed blind spots. Importantly, while these risks may or may not be financially harmful they will almost certainly inflict the most mental and emotional damage on us because we subconsciously or consciously avoided considering, and thus preparing for them. They were unthinkable.

Photo by Loic Leray on Unsplash