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This is why you should know your ‘risk profile’

It seems straightforward, but understanding the domains in which you’re willing to accept risk is underrated.

This is why you should know your ‘risk profile’
[Photo: Greg Rosenke/Unsplash]

When you think of risk-takers, what image comes to mind? Someone who loves to bungee jump? Your coworker who volunteers to go first presenting in a meeting? Many people are quick identify themselves as either risk-takers or risk-averse. But that designation doesn’t necessarily tell the whole story.

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First off, it’s worth defining risk. Taking a risky option means that there is some uncertainty about the outcome—often because there are factors that are out of your control that will determine what will happen. And at least one of the potential outcomes is bad. So, taking a risk means that you might get something wonderful, but you may also end up creating a problem.

There really are differences between people in how likely they are to take risks, but those differences aren’t general. Instead, research suggests that there are different domains of risk, and people may be willing to take risks in some areas but not others.

It is worth considering a few of these domains, because in those areas where you are really risk-averse, you may avoid pursuing important opportunities because of your fear of what can go wrong. In addition, in those areas in which you are risk-seeking, you may be courting bad outcomes. When you know your risk profile, you can be more mindful of the reasons why you make the choices you do.

In the context of business, one prominent risk is financial risk. Are you willing to lose money in the hope of making some? Many investments (in stocks, real estate, or companies) have some probability of loss but may also yield big gains. In general, getting significant returns on an investment comes along with risk of loss, while safer investments with little or no chance of loss also have low payoffs.

A second risk domain is social. Are you willing to engage in activities that might make other people think poorly of you in order to raise your status? Many people are afraid of significant social risks, which is why public speaking is such a significant stressor. They are worried that giving a bad talk will leave other people with a negative impression, even though a great talk can open up many new opportunities.

A third risk domain that is particularly important for business is ethical risk. Some people adhere rigidly to rules. They do not want to do anything unethical. Others seem to play fast and loose with the rules. They adopt the mentality that it is easier to ask for forgiveness than permission—even though ethical lapses can have severe consequences.

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The other two risk domains that have been studied extensively are less relevant for business. One is health risks. People who smoke, drink to excess, or engage in unprotected sex with many partners are taking chances with their health. The other is recreational risks. Bungee jumping and extreme sports are examples of recreational risks that some people may take but that others avoid.

As you look at this list, you may find that you embrace risks in some domains but not others. For example, I am willing to take social risks but not recreational risks. I don’t mind giving talks, playing in a band, or even singing karaoke, but no amount of money will get me to jump out of a plane with a parachute attached to my back.

As you get to know your own risk profile, you may want to think about why you embrace or fear the risks you do. Sometimes, you may be comfortable with your reasons. At other times, though, you may realize that you avoid risks for reasons that you are not happy about. For example, you may be afraid of public speaking but not really think that the downside is as severe as you make it out to be. In cases like that, you might want to work slowly to face some of your fears in order to reap the benefits that some risk tolerance can provide.

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