Decision Tips
Embrace change.
You miss 100 percent of the shots you never take.
—W. Gretzky
What do Oprah Winfrey, Bill Gates, Dustin Hoffman, Bill Clinton, Ray Kroc, Dolly Parton, Steve Jobs, Jim Carrey, and Pablo Picasso have in common? In addition to successful careers, they all took risks. If you’re looking for one characteristic that differentiates people who have achieved great success from those who haven’t, you would find that the successful people have taken a risk. They quit a job, they moved to a new city, they started a business, or they ran for political office. They did something that made themselves vulnerable and exposed themselves to failure. I’m not proposing that risk taking guarantees success. Clearly, it doesn’t. What I am saying is that it’s hard to become successful without giving up some security and taking a chance. As someone once said, “Behind every successful person was a mother who was convinced her kid was making a huge mistake!”
Take a look back at your risk-taking score in Chapter 5, “Are You a Risk-Taker?” How did you rate? Risk taking is a personality factor. We all don’t have the same tolerance for risk. If you scored low on risk taking, pay particular attention to this chapter and its recommendations. By actively trying to take more risks, you may be able to make more effective decisions. If you scored high on risk taking in Chapter 5, taking risks is already attractive to you. You need to be careful not to throw caution to the wind and seek out decision alternatives with oversized risks—choices where the downside losses significantly outweigh the upside potential.
It’s hard to become successful without giving up some security and taking a chance.
The easy route in life is to stay the course and not make waves. This typically means making decisions that provide predictable outcomes and minimal threats to your known world: staying in the town you grew up in; keeping the same job for your entire career; going to your “regular” vacation spot every year; maintaining constant hobbies and interests; and so on. The low-risk life is often characterized by an appearance of a lack of decision making. Although you saw in Chapter 32 that choosing not to decide is still a decision, low risk-takers are unlikely to see it that way. They think that by minimizing change they minimize risk. Low risk-takers are also likely to be the same people who, when they reach their later years, look back disappointedly and wonder how they got to their current life state. Rather than actively manage their life, they passively sat on the sidelines and let life happen to them.
What do we know about risk taking and decision making? Here are a few highlights. High risk-takers make quick decisions, but they’re also deliberate.1 Consistent with popular beliefs, high risk-takers use less time to reach a decision and use less information. However, and this is counterintuitive, they tend to process each item of information more slowly. Therefore, although high risk-takers may reach rapid decisions and restrict their information search, they give careful attention to the information they do acquire. Risk taking has also been found to change with age.2 In comparing risk-taking propensity among people between ages 22 and 58, it was found that both risk taking and the value placed upon risk was negatively related to age. That is, as we get older, we tend to become more conservative toward assuming risk. This is probably because older individuals perceive themselves as having more to lose. Finally, one of the most well-supported findings regarding risk taking and decision making (and mentioned previously in Chapter 19, “Is the Glass Half Empty or Half Full? The Framing Bias”) is that we tend to evaluate outcomes differently depending on whether we’re seeking to add to gains or avert a loss.3 We tend to be risk averse when we’re looking at gains and risk seeking when facing losses. We seem to be particularly willing to take on unduly high risks to recoup or avoid losses. Stockholders, for instance, tend to sell winners too early and hold on to losers too long.4 When an investment gains in value, we often pass up future possible gains by getting out too quickly. Conversely, when a stock falls in value, we often hope for an upturn and risk further loss rather than accepting the certain loss.5
This chapter is predominantly directed at people who are risk averse. I’ve tried to demonstrate the downside of resisting change and being overconservative. With that said, I am not proposing that you take a gambling approach to decision making. Risk taking needs to be undertaken thoughtfully, intelligently, selectively, and with careful consideration of probabilities. Alternatives with minimal chances of success, regardless of payoffs, are gambles. However, you don’t want to miss opportunities with good chances of success just because they have potential for failure.
The message of this chapter is threefold. First, embrace change. Change is not always a threat. It’s often an opportunity—an opportunity with risk but, nevertheless, an opportunity. Second, know your risk tolerance and use this information to choose alternatives that are right for your level of risk seeking. And third, take calculated risks. Don’t gamble. Carefully consider both the upside and downside potential from a decision. More important, recognize that if you’re risk averse, you’re probably overweighing the downside. Even worst-case scenarios are often not as bad as they first appear.
Embrace change.
Know your risk tolerance.
Take calculated risks.