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Risk Taking – In Life and In Money

Risking Money or risking life

Why is Risking Your Money Harder for Some than Risking Your Life?

"A ship is always safe at the shore - but that is NOT what it is built for."

― Albert Einstein

This post is a result of about a dozen ad-hoc conversations that Joel and I have had with different people over the past few days.  When I put them all together, I noticed two interesting trends surround the topic of risk-taking.

      • So many of the people we know have seen combat, which in my opinion is one of the ultimate risks you can take as a human being.  Yet, some of those same people are very risk-averse when it comes to money.

 

      • Joel and I were asked what we think makes us different from others in our generation, for better or worse.  One of the main things we came up with was how our similar backgrounds had given us a moderately high risk tolerance when it comes to money.

Since we run a blog that seeks to help military families improve their financial lives by sharing our experience as high performing finance professionals, I thought it prudent to share my thoughts with you.

The most stark dichotomy, to me, was how one can be so willing to risk their life to make a better life, but so unwilling to risk their money to make better money.  I have some ideas on why that might be, but I really want to hear from you.  You can comment with your thoughts by going to this post on our site and using Facebook to leave a remark.

My first thought is this:  The common belief is that risking your life is done for others, and risking your money is often done for yourself.  Those that sign up to put themselves in harm's way are doing it for their Country, for the future of their family, and to make the world a better place.  Many of those people have families that they also must provide for financially, and they often have the assurance that if they gambled their life and lost, at least their family would be covered financially through Servicemembers' Group Life Insurance.  When it comes to taking calculated risks with their money, however—i.e. starting a business, buying a home, investing in the stock market—the potential for loss is looked at differently because there is no "greater good", and if they lost, it would not just impact themselves but also the family for whom they are dedicated to provide.  Of course, the flip side to that is if you take a risk and are successful, the potential rewards can sustain that family better than you can without ever taking risks.  Still, and I bet you can feel it in your gut right now as you are reading this, it is easier to envision yourself risking your life than it is risking your money, isn't it?

But does that make sense?  Not everyone is able to take financial risks; I get that.  Whether it's due to health or heavy debt or lack of financial knowledge, you may not be in a position today to go out and take a gamble.  I would argue that those who can, should.  No advance in modern civilization has ever been made without taking risks.  Despite the widely held belief, it isn't just about you.

      • That family you are providing for, what could they benefit if you were better off financially?
      • Are you the family member that's being supported, while making little money yourself?
      • How can you benefit everyone by showing some initiative and taking a risk or two?
      • Do you have a skill or knowledge that can benefit members of society?  Get up and go share it, even if you are safer in your current role.  If you're happy and fulfilled, stay put.  If not, get moving.

And I say this all from experience.  Joel and I are doing it now, and it's been rewarding, but we have a long way to go.

We were asked what we think makes us different from others in our generation and we decided it was all about risk—how our similar backgrounds had given us a moderately high risk tolerance when it comes to money.  This means we've lived with little to no money before, we know what's it like to hustle, we know we can bring ourselves up as long as we have our health, and therefore we are willing to take calculated risks to be successful—but we don't like risk for the sake of being risky.  We want to win, and in order to win you have to risk, but hate losing.

"Don't be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better."

― Ralph Waldo Emerson

In our mortgage office here, there has been a rare exaggerated gap between fixed and ARM loan rates.  This has lead to us recommending ARMs to some of our clients, which is not something we always do, since the savings is not always this drastic.  I have an article about that here, so I won't get on the soapbox now.  However, having these conversations has led us to be surprised about how many people will accept a guaranteed loss of a known amount of money instead of a chance at a loss or gain of a variable amount.  That may sound confusing, so let me give you a crude life example that's not overly financial:

I like playing Poker with a group of friends of mine.  The competition is fun, and we have a great time hanging out.  I distinctly recall my friend's wife criticizing us for "gambling".  Her stance was this: we should all take our $20 and go play darts and have drinks at a local bar, since if we kept playing we would be tempted to keep betting (and losing) more money to each other.  You see, she was more comfortable with us spending $20 (or more) and having less fun than she was with us losing $20 (or more) and having more fun, and having a chance to be the one that actually wins the money!  And it dawned on me—people think there is a difference between spending money and losing money.  I don't, as long as you are getting something in return.  What do you think insurance is?  It's spending money to avoid losing money.  It's trading an undetermined loss that may or may not happen and accepting a smaller loss that will definitely happen.  Sometimes it makes sense, and sometimes it doesn't.  It all depends on how much that insurance costs!

My point is this: money is a tool that you use to improve your life.  You trade it for other tools; you trade it for food; you trade it for security.  It's a means to an end.  Sometimes the best way to spend that money on improving your life is to put it at risk of loss.  There is no difference between spending and losing money with the chance of gain—you can waste it either way and it can be worth it either way.  Don't get tricked by terminology.  As Shakespeare said, "What's in a name? That which we call a rose by any other name would smell as sweet."   While I disagree about roses smelling good, you get the point.

Strip away the psychological restraints and evaluate every opportunity with actual risks and benefits.  Here are some more mental resources that can truly help you do this in your everyday life.  I use these ideals every day:

Expectancy Value Theory and or Expected Utility Hypothesis – how to evaluate whether the chance of success is worth the cost of failure.  It gets complicated, but a simple calculation I use is:

- (Chance of Success) x (Value of Success) = Value of Risk

- Meaning if I have a 50/50 chance of succeeding, and I get $100 if I win, then (.5)x($100) = $50.

-So the value is of this opportunity is $50, which means if it will cost me $0-$49 I would do it.  If it costs $51-$100, I would NOT do it.

-Yes, this is a simplified view of the world and not always applicable, but sometimes a simplified view is exactly what you need.

Fear Setting, as explained quickly by Tim Ferris on this 1-minute  ABC NewsVideo, is helpful to understand the cost of failing

That's all for now!  I hope you enjoyed this little ditty on risk, and learned something new.  Join (or start) the conversation here: Facebook

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  1. […] in our writing–we don't want you to let fear of the unknown hold you back.  I've talked about risk; I've talked about using an ARM instead of a 30 year fixed loan; Joel's discussed how losing money […]