Eight Things to Consider When Evaluating Risks

Evaluating risks in our life is something we all have to do, but aren’t very good at.

The human brain is just not set up to understand risks.

People can’t intuitively grasp the difference between a 1/10,000 chance and a 1/Billion chance. 

We base decisions around fear of the lurid and strange, even when they’re incredibly unlikely, such as shark attacks, plane crashes, and children getting abducted by strangers.

We often fear even things that have literally never happened, such as Halloween candy with poison/razor blades in it, or Satanic ritual abuse. (Though people have had their lives destroyed over false accusations of Satanic abuse.)

Meanwhile we have no fear of mundane things that are much more dangerous, such as ladders, swimming pools, or the deadliest item we encounter in our lives, cars.

This gets even harder when we have major life decisions that center around unknowable risks. We don’t know how to evaluate them.

Motivational posters tell you any risk is worth taking. Of course that’s ridiculous.

I recently told the story of how my father ruined his life taking bad risks.

You need a sense of realism. If you’re 60 years old, 400 pounds, and have never exercised a day in your life, don’t risk everything for your dream of becoming an Olympic gymnast.

A Framework to Evaluating Risks in Your Life

That article about my father ruining his life was one of my more popular ones. But one piece of criticism I received was that it sounded like I was suggesting people not take risks.

That wasn’t my intention. The reality is that some risks are good and some are bad.

How do you distinguish between the two?

When evaluating risks, you need a framework to think through them logically.

Use your rational mind to compensate for humans’ weakness when it comes to grasping risks intuitively.

Here are eight things to consider when contemplating a major life risk.

1. How Do You Define Success?

When considering a risky endeavor, the first question is to define what success would be.

Is it becoming rich?

Becoming famous?

Your startup going public?

Changing the world?

Creating a thriving business?

Simply making a living while doing your dream work?

2. What is the Payoff For Success?

This is different from defining success.

Try to envision what your life will be like and how you will feel if you succeed.

Will being rich or famous make you happy?

If your new business works out, how much time will you need to dedicate to it? Will you be super stressed?

Try to be realistic here.

Keep in mind is that once people’s basic needs are met, additional money does not make people significantly happier.

That sounds counterintuitive, but there’s a lot of research backing this up.

Someone making $70,000/year is about as happy as someone making $10,000,000/year.

You may think that doesn’t apply to you and you’d be happier if you were rich, but everyone thinks that about themselves. Then those who do increase their income don’t end up any happier.

(An exception is those who start off poor. Additional income that helps them meet basic needs does make them happier.)

3. What is Your Path to Success?

It’s easy to visualize success. That’s just daydreaming and fantasy.

It’s a lot harder to get to the point where you are successful.

What is your plan to get from where you are now to being successful?

Be specific. Write down each of the individual steps.

Seriously think about how well you’d be able to achieve each of these steps.

What are the roadblocks you’re likely to encounter, and how will you overcome them?

Don’t just look at the most successful people in the world. Look at the people who started where you are now and achieved moderate success.

More importantly, look at the people who failed, and learn what tripped them up.

After doing this thought, analysis, and research, honestly ask yourself if the things you’ll need to do to get from where you are now to being successful match up to your skillset.

It’s a lot easier to find a different dream than to fundamentally change the kind of person you are.

In the long run, you’ll be a lot happier if you’re honest with yourself than if you keep chasing a fantasy that you aren’t really suited for.

4. What are the Chances of Success For the Average Person Who Tries This?

Of the people who take similar risks to what you’re doing, what percentage succeed?

This isn’t asking what your chances of success are, because it’s hard to be objective about yourself.

Look at the total pool of people who try.

What percentage of startups succeed?

What percentage of people who try to make a living as a writer are able to do so?

What percentage of musicians become genuine rock stars? Etc.

If you can’t find good statistics about this, you may have to go with qualitative answers like “very few.”

That’s better than nothing.

5. Is There Anything that Makes You Special?

Compared to the average person taking a similar risk, is there any reason your chances are better than average?

Here you need to be extremely self-skeptical to avoid any rationalizations that could lead you astray. 

Don’t fall prey to believing any of these reasons:

• You want it more. Everyone really really wants it.
• You’ll work harder than anyone else. Everyone thinks this about themselves.
• You wouldn’t be able to stand it if you failed. That’s just setting yourself up to be miserable. It doesn’t make you any more likely to succeed.
• You’ll never give up. It’s easy to say that before you’ve started or encountered any obstacles. But even if this is true and you don’t give up, that just means you’ll never do anything else with your life. It doesn’t mean you’ll succeed.
• You deserve it. The universe doesn’t care what you think you deserve.
• You’re you, you think you’re special, and you’re the hero of your own story. You see the world from within your own head, and naturally assume that if anyone is going to succeed in a difficult field, it’s going to you. Everyone else thinks the same thing too.

However, there may be some legitimate reasons to think you’re more likely to succeed than others.

• You have some sort of natural or unfair advantage. If you’re Stephen Spielberg’s nephew, breaking into Hollywood will be a lot easier. If you’re 7 feet tall, you’re more likely to make it as a professional basketball player than someone who’s 5’2”.
• You genuinely are more skilled/talented than most people who try to do the same thing. But be careful about this, because everyone believes this about themselves. Do people who aren’t your mother spontaneously praise your work, ask you to teach them, offer to pay you, or suggest you should do this professionally? If not, perhaps you aren’t as good as you think you are.
• You’re already having a fair amount of success before taking any risks. If you’re consistently making money at your side hustle, that’s a good sign that you’re more likely than average to be able to turn it into a career.

6. What are the Consequences of Failure?

What happens if you fail?

Does it put you exactly where you’d be if you hadn’t taken the risk?

Does it just cost you some money you can afford to lose?

Does it mean you lose a bit of time you otherwise would have wasted watching TV?

Or does it mean you lose your job, home, life savings, family, friends, and sanity, and end up homeless and broken?

That’s going to make a big difference to how you evaluate the risk.

And if you think you can ignore this because you’re sure you won’t fail, failure isn’t an option, or you’ll keep persisting until you succeed, that just means you aren’t taking the decision seriously.

Which is a sure sign that you shouldn’t take the risk.

7. What are the Consequences of Not Taking the Risk?

The risk doesn’t come in a vacuum. You also have to consider what would happen if you don’t take the risk.

This is what Economists call an opportunity cost.

There will be positive and negative consequences of not taking the risk, and those consequences will be reversed when you take the risk.

For example, if you leave a job where you earn a $100,000 salary to spend a year starting your own business, then this decision has cost you $100,000, before you’ve spent a penny.

On the other hand, if your job makes you miserable, you’ve gained the benefit of not having to put up with it, whether or not your business succeeds.

8. What do the People Who Care About You Think?

This is an area where a lot of self-help advice is exceptionally bad.

It tells you to ignore any doubters.

To assume they’re haters, jealous of your imaginary success.

But the people who care about you, care about you.

If they have grave concerns about the risk you’re taking, listen to them.

You’re probably too swept up in enthusiasm and imagination, blinded to any potential problems.

That doesn’t mean people who doubt you are definitely right. But you absolutely should listen to what they have to say.

Take the time to discuss with them. Explain your plans for overcoming those concerns.

If they come away convinced that you will succeed, or at least that it’s worth the attempt, then you can have a lot more confidence in your decision.

If they remain unconvinced, take that seriously.

An Example of Evaluating Risk

Going back to the story of my father ruining his life by betting everything on a terrible get-rich-quick lawsuit, here’s how he should have evaluated that risk:

Success was defined as winning a lawsuit for a huge amount of money.

The payoff for success would be being rich.

But this wouldn’t have made him happier. (And he probably would have squandered the money in short order.)

The path to success involved convincing a jury that someone who committed insurance fraud deserved to be paid many millions of dollars.

Which wasn’t realistic.

Lawsuits against the media for slander rarely work, and are completely impossible when there’s no evidence they said anything untrue.

So the average person was extremely unlikely to succeed

My father was a narcissist so he believed he had much better chances than anyone else to succeed, though there was no real reason to think this.

The consequences of failure, especially when he got to the point of stealing from his clients to fund the lawsuit, were to completely destroy his life.

While the consequences of not taking the risk were to continue to enjoy an extremely comfortable, wealthy, but not mega-rich, lifestyle.

And the people who cared about him – my mother and his employees – kept telling him that going all-in on this junk lawsuit was a terrible idea.

But he ignored them.

Evaluating a Good Risk

By contrast, here’s a good risk I once took:

The startup company I was working at got acquired by a megacorporation, and I quickly discovered I hated working at a megacorp.

I contemplated leaving my job to work at a new startup. But startups are inherently risky.

Success would mean the startup taking off and my stock options making a bunch of money.

The payoff would be that I could retire early. (Not be rich, but be free of the need to work, which would significantly increase my happiness.)

The path to success mainly involved factors outside my control.

Most startups fail, and there was no reason to think this one was special.

But what were the consequences of failure?

I wasn’t founding or investing in the startup, just working there.

So I’d get paid a decent salary while working an interesting job and building up my skills for a few years, and then when the company went under, go find a new job.

That didn’t seem so bad.

What were the consequences of not taking the risk?

Well, what I haven’t mentioned yet was that the megacorp I was working at was a company by the name of Blockbuster, and was in the middle of an obvious death-spiral.

If I didn’t leave, I’d be working a boring job while my skills atrophied until I was inevitably laid off or the company shut down. And then I’d have to try to find a new job with something mildly embarrassing on my resume. 

As to what the people who cared about me thought, my mother was initially concerned about me leaving the “big stable corporation” for the risky startup.

But once I discussed it with her and explained that the big corporation was much less stable than the startup, and that the consequences of failure with the startup were still better than the consequences of not taking the risk, she agreed it was the right decision.

Ultimately the startup failed. It never turned a profit and eventually shut down.

But I worked there six years, which is five years longer than Blockbuster lasted.

During that time my salary doubled, I learned a huge amount of new skills, and my career progressed enormously.

When I left that company, it was to be a Controller, or head of Accounting, at another company.

So despite “failing,” it was clearly the right decision.

Conclusion

A major theme of this blog, other than that self-improvement needs to be easy, is to be skeptical of one-size-fits-all self-help advice.

People telling you to take risks don’t know anything about you, your life, your skills and aptitudes, what you have to lose, or the specific risk.

You know your own life better than they do.

Some risks are good, and some are bad.

Hopefully with this framework, you’ll be able to evaluate risks in a way to tell the difference.

How about you? What are some major risks you’ve faced in your life? How did you evaluate them? Did you end up taking them? And was this the right decision?