Risk Aversion

A bias that leads to people taking the “sure path” over the “risky-yet-can-pay-off-big-time path.”

The reason? Risk can certainly pay off, but it might not. Playing it safe, however, can avoid the nasty things that no one likes, including stares of contempt from a spouse. Risk aversion causes us to stay in a job that we hate, rather than attempting to start a business where we’re the boss. The business may eventually pay off with fame and fortune, but it may not. The job we hate will at least provide a paycheck and keep the evil bill collectors off our backs.

Risk aversion has a flip side, like the Force. People tend to take increased risks to prevent loss.

Does this sound familiar? It somewhat becomes an escalation of commitment. It’s also indicative of people who need Gambler’s Anonymous. For example, a person who takes $500 to the casino and loses it all...may not want to go home empty-handed and tell the family that they can’t afford to go on vacation during Spring Break. As a result, he goes to the ATM, and takes out another $500 and plays with that…and loses, blowing next year’s Spring Break, too. Now he gets to go home and explain that the next two Spring Breaks will be spent watching reruns on Netflix, because he couldn’t stop gambling.

Point to remember: risk aversion can either be a fear of trying something that might seem crazy for a nice reward...or doing something crazy to avoid loss.