Nobody in business has ever avoided the uncomfortable necessity of sizing up a risk. A startup that takes a round of equity funding with unfavorable terms may keep their payroll safe in the short term at the expense of diluting equity in the long term. An individual who quits a job risks waiting a long time for a better one. A company may hire a new employee who has great potential but is untested.
In some cases, where there's a lot of available data, it's possible to make a good, well-justified assessment of risk. Credit card companies use your past actions and the behaviors of similar customers to make a good guess about how likely you are to pay your bills. Insurance companies live and die by their own best guesses about how often they'll have to pay out claims.
But for ordinary individuals faced with limited, subjective information, the old adage to "measure twice, cut once" is usually the best bet when it comes to making risky decisions. Here's the psychological reason why.
But there's often too little information at hand to make data-driven judgments of risk. In those cases, we tend to fall back on our gut feelings. If a particular situation feels safe, you treat it differently than if it feels dangerous or wrong.
And in many cases, our feelings are actually a good source of predictive information. Over the years, we've all developed expertise in certain areas. You've interacted with many people, which gives you a lot of experience to judge when people are treating you nicely and when they aren't. You've put in a lot of time at tasks like driving and going to work. When you encounter something that seems a little off, you often feel that there's a problem before you know that there is, or what it consists of.
The psychologist Gary Klein has studied expert decision making extensively, and in his work he cites examples of firefighters who escape buildings just before they collapse. Though they couldn't articulate the problem, they perceived that something was wrong, which led to them feeling that the situation was risky. Similarly, expert radiologists often report that they know there's a problem with a particular X-ray or MRI image before they can tell you what the problem is.
But that's part of the trouble. One danger of relying on feelings to judge risk is that we aren't always sure where those instincts come from, which can make them hard to trust. In fact, we sometimes combine feelings that result from multiple sources into a single judgment, and it's that subconscious psychological arithmetic that can lead us into error.
Understanding why starts with understanding how feelings work. Our emotions emerge from, and reflect, the way our motivational systems operate. Psychologists have found that the motivational system has two distinct modes: An "approach mode" that engages when there's a desirable thing in the world you want to achieve, and an "avoidance system" that kicks into gear when there's an undesirable thing you need to avoid.
When the approach system is active, we tend to feel happy, excited, and safe. As a result, we tend to judge things as being relatively low risk. But when the avoidance system is active, we feel more anxious and fearful. This system alerts us that we need to be concerned about potential risks. It emphasizes dangers and clues us in to the losses we may face.
At times, though, these two systems may be triggered by aspects of the environment that go beyond whatever item or experience we're trying to evaluate in a given moment. For example, quite a bit of research suggests that thinking quickly feels good. So if you're in the middle of a great conversation with a colleague and ideas are flowing back and forth, you'll engage the approach system. That may make any ideas you consider feel safer than they would were you to encounter them outside of that conversation.
Let's say your company is struggling to close sales, and you have a general anxiety about how progress on that is going. Those pressures may activate your avoidance motivational system. As a result, any new sales strategy proposal is more likely to seem risky. You might shy away from new ventures, even if they'd offer your company alternative sources of revenue.
This suggests that when you're making tough decisions, it's useful to evaluate them at two different times before choosing a course of action. That may feel like you're hesitating, but it helps you control the situational factors that might influence your decision. That way, you can disentangle your feelings about a particular approach from anything else that might also be driving your motivation at a given instance.
The upside, of course, is that you'll be using your emotions to help you assess a risk while minimizing the problems they can cause—instead of trying to subtract them from the equation altogether.