Some people have a poor understanding of risk. Much of the public tends to look at risk only in an absolute sense. They call certain activities “risky” and other activities “not risky”. As such, people tend to completely avoid “risky” activities at all costs while preferring activities they consider “safe”.

According to many sources, such as Dictionary.com, risk can be formally defined as, “exposure to the chance of injury or loss”. People don’t like risk because they fear loss. The actual probability of loss is often irrelevant – any hint of a potential loss, and some people just run for the hills.

The problem with this mindset is that it demonstrates a clear misunderstanding of risk, and in doing so, prevents individuals from maximizing their opportunities for success.

Risk is Inherent to Most Activities

Name any single activity, and no matter how safe you might think it is, I can probably present a possible risk. Cutting paper with scissors? You might accidentally cut your finger (yes I’ve done this!). Sleeping on your bed? You might accidentally fall off (again, this has happened to me!). Reading? You might get a paper cut!

Clearly, almost no activity is completely exempt from risk – so to label some activities as “risky” (in an absolute fashion) but not others seems rather strange. If you were to avoid every single activity that had a possible risk, you wouldn’t be able to live.

Imagine an alien coming to observe Earth today for the first time. It sees thousands of cars roaming around the world at speeds reaching over 100 km/hour. This alien might say to itself: “Wow, are these humans crazy? Those vehicles are moving ridiculously fast – that’s way too risky!”

Of course, you would probably laugh if you heard that. Having been in a car for thousands of hours your entire life, you believe driving is relatively safe. Unbeknownst to the alien, you have taken lessons and performed numerous tests to achieve your driving license.

However, driving isn’t perfectly safe. In the United States, over 40,000 people die in car accidents every year. Clearly, there is some significant level of risk involved in driving, whether you are a driver, passenger, or pedestrian. In spite of this startling number, many of us still drive – why?

Risk is Relative

The amount of risk involved is not just different from activity to activity; it is affected by numerous factors, and can even vary from person to person. That is, we often assume that each person has the same level of risk in an activity, when this is in fact not true.

The reason why many car accidents occur is because some people are better drivers than others. Irresponsible individuals who drink and drive are more likely to get into accidents. Inexperienced drivers are also more likely to get into accidents than drivers with more years under their belts.

Clearly, you can reduce your risk of getting hurt while driving through experience and being responsible. Conversely, you can increase your risk of getting into a car accident by being a poor driver – distracting yourself, drinking, not following rules, etc.

The reason why most people don’t consider driving “risky” enough to stop doing it is because most people are decent drivers. And even if they aren’t drivers, they know how driving works enough to believe it isn’t “risky enough” to stop doing. This is primarily because driving is extremely common – most people know and understand it to a fair degree. That being said, considering that an alien would have no idea how common or complex driving is, it shouldn’t be surprising if it would think driving is very “risky and dangerous”.

People Often Avoid Risk Out of Ignorance

The mistake people make when calling something “risky” is that are generalizing the activity – what they are really saying is that the activity is risky for them.

A good, responsible driver wouldn’t say driving is really that risky. On the other hand, someone who has no idea how to drive would probably say that it is – and he would be right, in the sense that as an inexperienced driver, it would be pretty risky for him to jump into a car and get on the highway.

The problem here is when people assume instead of trying to understand. When we make no attempt to understand how something works, then our degree of risk does not change, and we will never be able to safely engage ourselves in something new. That is, instead of learning to manage risk, often, people just choose to avoid risk.

Over the last few years, the popularity of poker in the mainstream media has allowed it to emerge as a billion dollar industry. In the media, it is a game portrayed as being primarily based on luck, and subsequently, a game that has ruined many lives. Based on the way poker is presented in the media, most people believe the amount of skill required (if it all) is minimal. In fact some of the most intelligent individuals I know consider the amount of skill required in poker to be negligible.

Like many teenagers my age, I caught the poker bug when it came out on television too. But competitive by nature, I wanted to learn how to gain an edge when I played with my friends for fun, so I did some research online. What I stumbled upon blew my mind. I started reading some discussions between some of the world’s most successful poker players, and was amazed to see the amount of thought process that went into their decision making. When I noticed the level of analysis and deep level of logical thinking often involved, I wasn’t surprised that certain players were as successful as they were. It was obvious to me that the players winning at the very highest levels were extremely intelligent, and used their strong analytical skills to reduce the risk and volatility created by luck.

Yet most people don’t know this, and probably never will. Like with many less common activities, most people are oblivious to how they actually work, and subsequently, do not accurately understand the risk involved and whether/how that risk can be managed. The public hears about a small sample of people who are unsuccessful at an activity from the media, and subsequently assume that no one can be successful. We see similar phenomena in other “traditionally risky” activities such as investing, trading, etc.

Whenever we see individuals successful in such “traditionally risky” activities (and particularly when we ourselves are unsuccessful in them), it is easy to assume that only luck is involved – and of course it is involved in some way, but random luck affects everyone in every activity. The problem with this mindset is that it often acts as a barrier to the truth – it prevents us from asking if and how these successful individuals reduce the risk and volatility involved to maximize their chance for success.

Understanding Your Tolerance for Risk

It is extremely important to know how much risk you can afford to take. Another common mistake that people tend to make is assuming that everyone’s tolerance for risk is the same – it’s not.

For instance, if I were to offer you my $10,000 for your $5,000 on a single coin flip, would you take it? In the long run, this is a good offer for you, since 50% of the time you will lose $5,000 and 50% of the time you will win $10,000 – that is, in the long run, you would be making $5,000 on average every time we do this.

However, if you’re a student, you probably wouldn’t accept the deal because you probably can’t afford to lose $5,000. Does this mean the offer is risky? Not necessarily – it depends on your tolerance for risk. If you are Bill Gates, your tolerance for risk is much higher in this scenario, and you could easily afford to risk the $5,000.

Certain activities can be dangerous if you don’t understand how much risk you can safely take – knowing this is a skill in and of itself.

If you look at some of the most successful individuals in a variety of fields, they tend to be the ones who understand their personal tolerance for risk much better than others. They are much better at estimating what level of risk they can handle without harming themselves – that is, they are able to handle an amount of risk that is close to optimal for their situation, thus achieving the maximum reward safely possible.

Where to Go From Here

Realize that you can’t live life avoiding risk, it’s just not possible. Instead, recognize that if there are people who are successful at something, there is probably a way to manage the risk involved.

There are many amazing opportunities in our world that are significantly untapped – often, the reason is a poor sense of the risk involved, and the fact that most people don’t realize this risk can be managed. Do your homework – educate yourself. Ask people who are successful in those fields.

Don’t create barriers to opportunity simply because you don’t fully understand how they work yet.