Thoughts on Risk

WARNING: the below is a bit more weighty and philosophical than the majority of the posts on this blog.  That being said, for those that are still interested I’d be interested in your thoughts on the concepts below.

I’ve been thinking a lot about risk lately.  This is no doubt spurred in large part by my day to day work as a banker which ostensibly involves assessing risk and quantifying levels of comfort in exposing our assets to these risks.  Without getting into the nitty gritty, it is necessary for us to take on risk in order to earn a return on our money.  We earn this return by making loans to companies and receiving interest payments in return for taking on the risk.  Though we go through great pains to mitigate the risks related to each deal, inevitably there will be situations in which our bets do not work out and we actually lose money on a loan.  In fact, if our loan losses are too low, there’s a good chance we aren’t taking enough risks (and are leaving money on the table!).

Now you may be thinking, “that’s all well and good, Zack, but what in the world does that mean to me?  I have a hard time figuring out what to eat for dinner much less think about the nuances of risk - I’ll leave that to the financial types.”

If only it were that easy.

You see, the more I think about risk, the more I realize that we are confronted with hundreds if not thousands of risk decisions every single day of our lives.  That’s right - all of us, every single day.

Most of these decisions are so easily analyzed and concluded that we act on them almost instantaneously and seemingly naturally.

For example, when I pop out of the subway this evening and have to cross the street, I will undoubtedly wait for oncoming traffic to stop before walking.  This is in spite of the fact that I could attempt to cross the street Frogger style in a mad dash, hoping to avoid oncoming taxi cabs and buses.  But the risk (death) weighed against the relative reward (marginally faster transport to the other side of the street) makes this decision quick and easy.

Risk such as this is hardly interesting, save for the times when individuals choose to fly in the face of the odds and in turn create a “News of the weird” or “can you believe he tried that” type headline.

When risk is really interesting is also when it is most excruciating.  By this I mean times when the ability to properly assess the risk/return is unclear due to an inability to quantify the inputs or outputs.  Or when the risk and return are both so meaningful that they will require an investment beyond anything the risk taker has ever conceived of before.

In this sense, I’m talking about real life risks - the impossible to quantify yet inherently invaluable big picture decisions which affect not a rate of return but instead things like happiness, contentment, and the way we look at our lives.

Of course, there’s no spreadsheet or model to tell us how to act in these cases.  So more often than not we choose either to avoid the analysis altogether or to conveniently consider only a portion of the equation, either the risk or the return, without regard for the other.  Yet both of these choices leave us wanting more.

Remember, like the Bank, we have to take on some level of risk to earn a return on our investment; otherwise we’re just sitting on the bench or leaving the proverbial money on the table.  Choosing to only focus on the risk results in this type of behavior.  Focusing only on the reward is just as false a doctrine, and leads only to disaster (see AIG or the latest politician to sacrifice family and career for a short-lived romantic fling).

In conclusion, I encourage us all to think about risk today, perhaps in a new or different way than ever before.  Where have we allowed our fears to cloud our views on risk/reward?  Which of our actions need to change in response to a newfound realization of the risks at hand? What is the risk and potential reward we’ve never dared to allow ourselves to consider?

I’m confident a more dedicated analysis of all these types of questions will lead to a more cogent view of the risks and rewards we all face - and a better return on this investment we call life.