This is how to consider risk & asymmetric bets
May 13, 2020
Risk matrix
The traditional view of risk management invites us to consider a risk matrix, wherein we assess the probability of any given adverse event occurring, and the severity of its impact should it come to pass.
Businesses normally undertake such a risk assessment as part of their continuity plans.
When considering risk for your own personal situation and strategy, I believe you should also consider assessing third and fourth dimensions of risk.
Extra dimensions
Firstly, you should additionally take into account your skills and level of experience, because what might be considered risky for one person may not be so for another.
For example, a complex property development might be risky for a first-timer, but not so for a seasoned developer undertaking their 20th such project.
A similar principle might apply to a business venture or proposition, whereby the level of risk might be as much determined by your level of business experience as the numbers or terms of the deal in question.
Kelly & your wealth goal
Secondly, you might also assess and manage risk in the context of your own current situation.
The trick is to look for opportunities with limited downside to you, but unlimited upside…commonly known as asymmetric bets.
The Kelly Criterion as it relates to your wealth journey suggests that the closer you edge towards your wealth goal and your ideal life the less risk you should be willing to take, since you effectively have more to lose.
On the other hand, if you potentially have a long earning runway and your current situation is unsatisfactory to you, then you might be more inclined to take on some more uncertain decisions or ventures.
Risk is subjective
When I quit my last full-time job to go travelling and then set up my own business this might have been considered a risky move in one sense.
But I took the view that I could always go back to doing a similar role, probably with a similar level of remuneration, or perhaps with slightly lower pay.
So the downside for me at that stage in my life I considered to be low.
But the upside of open-ended global travel and running my own show I considered to be practically limitless, especially when I considered that time freedom could potentially be our most valuable asset of all.
Put another way, risk is often subjective, rather than objective.
I discussed these concepts a little further in the short video here
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