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You’re More of a Risk Than You Think You Are


risk-management-24354901Risk: We are constantly being told to look out for it, and for what I have gathered, outwardly, we have become very good at recognizing it. From insurance prevention and business management to investment analysis, scores of actuary estimations, compliance regulations and financial projections, are regularly adjusted to prognosticate the possibility of loss or damage, be it physical or financial. We are well rehearsed in knowing how to see external forces of harm or hazard for what they are, however, these factors only highlight the requirement of something being done to you. Risk – as it turns out – for it to be fully seen as what it is must be evaluated with an inner lens, that being said, many of us only accept risk as an act done to us by someone or something else rather than ever perceiving it with an internal perspective.

I read an article recently that examined why a lot of intelligent people – regardless of experience, education and accomplishments – seem to find it challenging to gain employment. Surprisingly ‘smart people’, the article stated, are more prone to incorrectly trust their gut instincts. The writer’s findings pointed to a study on biases that are referred to as “blind spots” in peoples’ reasoning abilities when it comes to processes in decision-making.

Immediately I was drawn into the possibilities of why some more than others may find it difficult in using their instincts, and, if, given the employment struggles, it is predicated to what a person set out to do in life. If I were to look at it from the dynamic of investors, people – it seems – are getting away from using instincts (applying what you know) and becoming heavily reliant on computations to tell them what financial decisions to make.  The debate over high frequency trading lends itself to this notion of exchanging thought for algorithmic calculations – which is perfectly fine for those who do – but, when it comes to a decision that will impact everyday life (for example, landing a job, going back to school, starting a business), are people inadvertently getting away from using their instincts and, in essence, waiting on someone (or something) to tell them when it is time at act on their own behalf?

According to the Federal Reserve Bank of New York, the employment conditions for recent college graduates – despite current increased unemployment rates, working more part-time and experiencing underemployment – suggests that such difficulties are not a new phenomenon. It has, in fact, been so for over the past two decades.  Additionally, when compared to all work groups (defined here as those who are sixteen to sixty-five), from a period of between 1990 through the first part of 2013 (all three recessions included), “the unemployment rate averaged 4.3% for recent college graduates compared with 2.9% for all college graduates.”

What does this have to do with risk you ask? It has everything to do with personal biases. It’s easy to target a nation’s labor market as the reason for not finding a job when it’s the large pink elephant in a very small room – but please don’t take this harshly. The pink elephant analogy only aligns with bringing awareness to the perspective blinders claim mentioned in the article. Most people can recognize biases in others more easily than in themselves. In other words, when it comes to using your instincts (whether viewing them positively or negatively), many people have difficulty in understanding their own personal level (or measurement) of fortitude or flaws; i.e. biasness. Biasness prevents many of us from looking inwardly at our own measure of risk. And if you don’t have the ability to measure your strengths, then surely you are not able to fully assess your weaknesses as well.

Is there a direct or indirect correlation to a person’s vocation and whether or not one is more adept at using their instincts? For that, I cannot say. However, I guess in my own biasness, I have determined that the standardized “What are your strengths and weaknesses?” questions need to be done away with during the interview process. As you see, people are generally unable to provide an unbiased portrayal of their skill sets as intelligence – besides cognitive (reasoning) and heuristics (gut instincts) – makes up just one of the variables to judging self-serving rational thought.

As we have delved into the importance of recognizing biases, let’s now get back to the matter of risk.

From a business or investment standpoint, risk is defined as “the uncertainty associated with the unique circumstances of a particular company which might affect the price of that company’s securities,” courtesy of QFINANCE.

In relation to investing, time is another consideration that is taken into account (Do I want the proceeds from the business venture now or later?). We are also taught to consider ourselves when applying levels of risk to our decision-making (How risk averse am I?). When investing, or gambling for that matter, we understand risk from the value placed on currency but, at the same token, we misplace risk when it comes to ‘us’ as the emphasis.

To reiterate, in finance, an option is a financial contract (a contract on “pieces” of shares of stock) that one can buy that gives them the right to buy or sell the “whole” share of stock. In everyday terminology, an option is simply a choice to accept or reject another decision that affects a previous decision or begins a new one. Here in lies a problem that may arise with having options: someone may restrict too narrowly or broaden too explicitly. In other words, you can either pigeonhole your ideas or set them too broadly. Those who like to ‘weight their options’ are not realizing the more things to consider the less likely the right choice will be made. In either case, you’re not properly assessing risk. Unlike in investing where it’s necessary to spread risk in many areas, the hazard is in applying this same principle to everyday life.

Likewise, as in the study for capturing either a “gain or loss framing” outcome from the study participants, you too can change a perspective by rephrasing the decision: Rather than saying “What are my choices?” try saying “Which choice will present less risk?”  Managing risk as a means to incorporating instincts can improve problem-solving abilities.

I say for gut instincts, whether right or wrong, use what you know. If you are smart, then, it will not be foolish, it may very well be a wrong decision but not a dumb one.  If we are capable of determining risk in objects, then we should be able to apply that same reasoning to ourselves as “beings”, or things, and recognize a risk when we see one.

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