Sensible Risk-Taking for Everyone

By Kari Firestone

We’re all fascinated by risk-taking.  Who can resist watching someone fly off a cliff wearing a bat suit with a measurable chance of smashing into a sheer rock face?

Ironically, while we’re sitting smugly on our overstuffed sofa, wielding the remote control, we may be unwittingly exposed to all sorts of risks from the investment in our pal’s gastropub to the confrontation we initiated at a management meeting that afternoon.

There are many studies which report that Americans are under more stress than ever and increasing evidence that higher stress level leads to more risk-taking.  Given this connection, it seems advisable to enhance our own risk-taking skills.

We might consider four tenets of sensible risk taking which could come in handy: right sizing, right timing, relying on knowledge and experience, and remaining skeptical of promises and projections.

Often, people quit a job to buy a business and its assets, using most of their savings plus taking on debt.  If the business, whether a hair salon, insurance brokerage,  or auto body shop doesn’t generate enough to cover living expenses plus the interest, the owners might find themselves under severe financial distress, the result of failing to understand the scope of the risk being taken.  It’s important to consider how long it will take before the business generates what the job did and whether you can survive until that point before plunging into such a venture.

Right sizing can apply to individuals in all professions.  Did Donald Trump truly right size the risk of a backlash from a large group of voters in the general election when he decided to advocate for a wall spanning our border with Mexico?   It’s possible that he did not carefully weigh the benefit of gaining cohorts, supporting the wall, against the cost of losing other votes.

Recently, in an attempt to gender integrate the men’s “final clubs” at Harvard, the dean of students issued a recommendation, quickly endorsed by the administration, outlining the severe consequences of belonging to a single gender club, fraternity or sorority.  These include a ban on any leadership position at a Harvard sanctioned organization or team, and the refusal of Harvard to endorse any club member for a post-graduate merit scholarship, such as a Rhodes or Fulbright.

In effect, Harvard has ensured that no highly motivated student, in a college full of them, would join such a club, thereby obliterating them.  Did Harvard really consider how the antagonistic tone of the letter and its strong-armed tactics (think of how medieval armies surrounded the base of mountain towns, starving their inhabitants to death) might alienate important members of its community, including wealthy donors or women who founded their own single sex clubs?

The next tenet, right timing, is about understanding how the timing of an action might impact the outcome.  For example, when Martin Shkreli, the CEO of Turing Pharmaceuticals, raised the price last year of Daraprim, a seventy year old drug to treat rare infections by 3000%, he violated right timing.  Particularly in light of the persistent drumbeat denouncing excessive price gouging, Shkreli should have taken note and either moderated the appreciation or waited to see if the outcry subsided.

If you are near the end of the lease contract on your office space, which you’ve really enjoyed for twelve years, and the structure across the street is likely to be demolished, with a huge tower possibly going up on that spot, how can you use right timing to avoid, potentially, years of inconvenience?  Is there a price low enough that will make living next to a construction project palatable?  If not, we should hold out as long as possible until the picture clarifies about the future use of this prime downtown spot.  I don’t suppose the city will insist it become a pretty green park.

If you find and buy your dream house, which needs lots of work, you need to consider the timing of when to put your own house on the market.  The market might be so hot that if you put your current house on the market now, it will sell for a huge premium, requiring you to move well before the construction on the new place is done. Right timing would suggest that you try to time your own sale to coordinate with when the renovation project will be complete.  Otherwise, you’ll be paying rent for months or living in your in-laws basement.

My hair stylist, Malika, recently went to Syria with her husband for his mother’s funeral.  I told her that I understood that her mother-in-law would only have one funeral, but I was worried about the trip resulting in additional funerals if they traveled now, through very dangerous territory where there is limited electricity, running water, and check points every few miles.  They went and returned, so maybe I was wrong.  I think I would have sent my husband and stayed home.

The third tenet is to rely on knowledge and experience in risk-taking situations seems obvious but we often ignore this principle.

Brian is a great short seller of tech stocks who uses his PhD in computer science to identify companies whose stock valuation is about to be challenged by the introduction of a better technology.  He decided to short a consumer stock because he was convinced that the market was so crowded with similar apparel and constant new entrants that there was no room for growth.

Unfortunately, he had no experience with shorting clothing companies and the market didn’t see it his way. The competitive firms did not gain enough of the market to damage the company he was shorting.  Brian lost a ton of money by straying from his own knowledge and expertise.

Most startups fail, or, if not, they take years to break even.  If we are saving money for our children’s college education in a few years, we might call on that knowledge to avoid investing in a new venture, at least an amount that would jeopardize the college financing.

There is no substitute for being skeptical of promises and projections, the final tenet of sensible risk taking.  Marg left a steady job to take one at a biotech company convinced by the extremely enthusiastic management team.  However, their first product, not yet in human trials, would not likely hit the market for at least seven years and their cash would last only two.  She and her husband, a freelance writer, had just bought a condo with a hefty monthly mortgage.

Two years into her tenure at the company, her boss explained that they needed to realign some divisions, rendering Marg’s position obsolete. She had watched other biologist friends with major financial obligations struggle when their company’s lead compound failed, the stock tanked, and they lost their jobs, but never imagined it could happen to her.  Marg should have been more skeptical.

While it seems obvious to consider the risks and rewards we face across all aspects of our lives, it is amazing how frequently we see friends, acquaintances, public figures and even ourselves fail to objectively evaluate the consequences of our actions. It’s possible that the pressure and stress we face in the quest of instant gratification and rapid communication may lead to more impulsive behavior.  Breaking situational risk into these four tenets of sensible risk taking and applying them in our everyday lives is a worthy exercise.