Friday, February 22, 2008

Nothing Risked…

I recently had a brief conversation about risk with a client and friend of mine that leads the Information Technology Department for a nearby Ritz Carlton. One of the sum results of that conversation was that there are two kinds of risk: The stupid kind and the smart kind. There are countless individuals in the world who behave in such a way that they don’t factor risk much into their actions and behaviors. There are, however, those who calculate risks into their activities and understand the dynamics of this powerful thing.

Drive somewhere in the town or city in which you live. I will bet that the larger the municipality in which you live, the worse the drivers are: It appears that they use minimal, if any judgment. Maybe they have a cell phone to their ears; maybe they are exhibiting poor driving skills; maybe it is a combination of factors. At any rate, professional drivers are often taught the art of “defensive driving” which dictates that you, as a driver out on the roadways, must drive with the anticipation that someone is going to use poor judgment and that you must be able to drive in such a way as to be proactive or react accordingly to these drivers whom have increasing amounts of risk factors piling up on them.

I’ve once heard it said, or read it on a bumper sticker, that life is difficult; more so if you’re stupid. Stupidity has often been equated to ignorance. Think of the driver while you are out and about that is ignorant of the traffic laws, or (worse yet) ignorant of those around him or her. Those who aren’t aware of risk often overlook the power that it has in their lives and the world around them. Perhaps I could even go as far as saying that they are more apt to be “victimized” than the alternative.

I’ve often equated risk management and the world of insurance as one that assigns numerical values to behaviors and calls these information sets “risk factors.” For example, take a driver who fails to use their blinker all the time. This driver has a higher probability of getting into a collision with another driver by not notifying those around them as to their intentions on the roadways. If they also fail to use their mirrors properly, the earlier risk factor adds to this new risk factor. Additional factors only add to the mess. While one can easily apply this to any part of life, not just driving, there are ways to minimize your exposure to such risk factors.

For a few years I lived in the Rapid City, SD area. Just as the schools were heavy into “character counts” campaigns with their students, a local television station ran a series of advertisements much to the same effect geared towards adult audiences. One of these public service messages included a judge discussing the merits of discipline. Essentially the message was that even just a daily investment in self-discipline works wonders for hedging against. If you are self-disciplined enough that you can take a walk or do another sort of moderate exercise you decrease risk factors that would otherwise influence you becoming obese, becoming depressed, getting diabetes, or otherwise becoming physically or mentally unhealthy. Think of the things that you could do less of or do more of on a daily basis that would make your life better, increase your value, or otherwise might make you or those around you better.

With that being said, there is absolutely no way to mitigate all risk involved with something. Just as the stock market has something called systemic risk that is inherent to a particular industry or to the entire market. Whenever there is the potential for gain or reward, there is always risk. In fact, since there is always risk involved any time there is reward or gain possible, it has been argued that gain and reward are possible because there is risk involved.

This is why the best risk is that which is of the calculated variety: This is why the stock markets will always correct itself, will always (eventually) increase in value, and why most of us will realize gains to ourselves or our lifestyles over a long enough timeline and given enough effort. If we are able to learn how to calculate risk in our lives we can then move our lives from being at the unsophisticated level of the haphazard risk-taker into being the sophisticated, calculated risk-taker and, along with it, move our lives along a more successful avenue.