Good Risk Versus Bad Risk: Are You Taking All The Wrong Chances?

By Jonathan Timar
2 Comments

Risk is a good thing. Without risk there is no reward. In most cases the greater the possible reward, the more risk involved. Therefore when one takes a risk, they should first take into account they possible payoff to determine if the risk is worthwhile.

When you invest your money in the stock market, the risk is worthwhile because there is a high degree of probability that you will increase your net worth over the long-term by doing so. There is a chance that you might lose some money in the stock market, but you will most likely be able to sell a losing stock before you have lost all of your money. If you don’t invest, and instead keep all your money in a sock drawer, you will lose ground because of inflation. Therefore investing in the stock market is a good risk.

On the other hand, if you take your money down to the casino and bet it all on  roulette, even though you have a chance of making several times your “investment” back, mostly likely you will lose it all, so roulette is a bad risk.

Ok, you got me, those examples are cliché and obvious. “Of course the stock market is a better risk that roulette!”, you say.

Well. Yeah. So consider this:

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    Beatrice (name changed to protect the innoc…er…guilty) has a crummy minimum wage job in retail. She doesn’t like it much, and never feels appreciated at work, even though she knows she works harder than everybody else. As a result, she’s not really motivated to go there every day, especially since she has an hour-long commute into town. So every morning she wakes up and drags herself out of bed. She procrastinates through the morning, eating a leisurely breakfast, and not hitting the shower until five minutes before she needs to leave. When she finally does leave she is in a panic which results in a frenzied drive into work at often breakneck speeds, passing cars on all too brief straight stretches on a windy highway, all to avoid being late for a job she doesn’t even like anyway.

    I don’t think I have to tell you that the risk Beatrice is taking every morning is a bad one. But let’s break it down:

    • Possible Reward: By speeding and passing several cars on the way to work, Beatrice can avoid being reprimanded by a boss who doesn’t respect her anyway, at a job she doesn’t really want to be working.
    • Risks Involved: Beatrice is risking getting an expensive speeding ticket, excessive wear and tear on her car, the possibility of an accident resulting in an insurance claim, the increased chance of hitting and killing a pedestrian, a cyclist, or someone’s pet, and losing her own life.

    All of that risk is hardly worth it, but millions of people take those exact risks every day without even thinking about it. The worst part is that none of that risk is necessary, all that’s required to eliminate all of it is to wake up ten minutes earlier, or have cereal for breakfast instead of eggs.

    Risk is necessary for growth and for achieving success, but that risk needs to be calculated and carefully evaluated.