Most people are too risk averse

I’ve noticed for a long time that most people are excessively risk-averse. Not everyone, of course, but most people.

This is understandable given our evolutionary background. We evolved on the edge of survival – starvation, disease, predators, and attack by enemies were rarely distant. But today’s world is mostly safe and has large buffers – we can afford to take more risk than most people seem comfortable with, and in cases where the expected reward is large enough, we should do so.

I’m not suggesting you run out to your nearest casino and bet your life’s savings – casinos (and lotteries) have negative expected returns. The house always has an edge. Generally you should never take such bets – take risks when (a) the expected return is positive, and (b) you can afford to lose.

But risk itself isn’t something to shy away from, provided that on average you’re going to win.

Examples of people commonly being too risk-averse:

• Investment portfolios. Banks are safe but returns are much lower than the average stock market investment. If seeing the value of your investment drop over a period of weeks or months will cause you to lose sleep, you should probably avoid the stock market. But if you’re a long-term investor and willing to be patient for years, the stock market almost always wins (do diversify).
• Diet. The media loves to tell us that eating this or that is “bad” for us, and on average it often is. But a doubling of risk doesn’t mean much when the risk is tiny to begin with. Lots of foods give us great pleasure – skipping them on account of “risk” is often a losing game. When the chance of disease X is “doubled” by eating food Y, ask what the chance is in the first place. If it’s 1 in 1 million, doubling the risk means 2 in 1 million. Is that worth giving up ice cream?
• Surgical interventions. We all fear death, but we are all going to die. My father had a slow-growing carcinoma on his face at age 89. The idea of “cancer” scared him so badly that he went along with having it removed, despite it being likely for him to die of other causes before the carcinoma would affect him. The surgery deformed his face, and didn’t get all of the cancer. So he had them go in again to get it all. The result was so disfiguring that he was reluctant to go out in public for the rest of his life. He died of other natural causes at age 96.
• Helicopter parenting. The media is full of child abduction stories, but these are cherry-picked from the entire planet of 8 billion people. Actual abduction by strangers is extremely rare, and much less common than it was 50 years ago. Crime rates in general are at historic lows. Don’t deny the free and adventurous childhood you or your parents had to your own children. Not only will you stunt their independence, confidence, and ability to cope with the unexpected, but for no good reason – the world is safer than it has ever been. Despite what the media tells you.
• Insurance. Insurance is a great thing for risks you can’t absorb – your house burning down, the breadwinner dying. But don’t buy insurance for things you can deal with yourself. Don’t spend $5 to buy the “extended warranty” on a $50 item. If it breaks, you can afford to buy a new one. Insurance companies know the odds, and price the insurance (or warranty) so they make a profit. Accept the risk (it’s called “self-insurance”); it’s cheaper.
• “Voiding the warranty”. Same idea – it’s your product, your property. If you want to open it up and modify it, go ahead and do it. Even if it voids the warranty. What’s the chance you’ll need that warranty? Probably small. What’s your loss if you do? Probably also small. Weigh that against the benefit of doing whatever you want to do with it.
• Careers. People are often reluctant to quit a bad job or start a business because of “risk”. Yes, there’s risk, but, again, weigh that against the potential benefits. Most people can find another job pretty easily if things don’t work out.

Life is risk. Getting out of bed in the morning is risk. But avoiding all risk means avoiding all life, and eliminates the possibility of winning.

Financial risk is buffered if you have savings – another reason to spend less than you earn – savings let you take risks that might lead to big wins.

If it bleeds it leads, and the media gets clicks by scaring you. Be skeptical. Judge by the things you see personally, the people you know. Not what you see on the screen.

Take calculated risks. Where the benefit seems to outweigh the risk, and you can afford to lose and try again, take the risk.