The word Risk always excited and intrigued human mind…though it was never the case that all people liked Risk. After the word ‘Love’ the most discussed word by human beings across the globe is ‘Risk’ thus making this word as one of the most sought after word in the history of humankind.

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‘Acres of paper and litres of ink’ are utilised by the experts in explaining the word ‘Risk’. For me the word Risk is something unknown; may be unknowable… yet we think of ‘Risk Management’! From a transcendental point of view ‘Risk’ is like the ‘God’…everything, both known and unknown, are attributed to God, explained through God, in God…yet the God remains unknown and unknowable to the human mind.

This is the first of the series of articles and is a foot note to the enchanting concepts of Risk & God. Don’t you now think ‘Risk is God?’

Please read on!!!

Risk and Life:

I think ‘Risk’ is necessary for all living beings. You can’t live peacefully without venturing out into the unknown. I like my comfort zone. Don’t you? I like to know what I know. I like to sit around with comfortable people doing comfortable things in comfortable settings. I like to do what I like. It’s human nature. I prefer safety to risk. And if I have to take a risk I want it measured, controllable.

The more I get comfortable the more it becomes all about me. The storyteller Stephen James said “Most people work in jobs they don’t like, for a boss they don’t respect, with people they can barely endure to make enough money to buy a whole lot of things they really don’t need. Do these things long enough and people look at you and say “Wow, he/she has really achieved success.”

So, is that really a living? I’ve been through all this. I have done repeatedly all that. It is really boring. I know you will refuse to believe.

This life of living & peace, I think, is lived out by many people in such a way that it looks like it’s as interesting as root canal! It’s predictable, heavy on rules, and much about score keeping. Welcome to life.

I’ve experienced life though that’s different. It looks like this: Risk + God= Life. When I risk, trusting the God for more, not less I really do feel like I’m on the peak of life. It’s a little scary. Let me take that back. It’s a lot scary. That’s because I don’t live out there on the ‘edge’ enough. I get out of practice. Have I already told you I prefer safety to risk?

So, what does this all mean? Maybe it’s time for life – risk + God. There’s enough in nature that reminds me to invest my life. Is there a dream I need to deal with? Can my dream intersect with someone else’s to take me somewhere that’s greater than my own personal vision?

Difference between Risk and Uncertainty:

The difference between risk and uncertainty leaves me uncertain. So I am going to risk my time to answer this very question. What is the difference between risk and uncertainty?

Risk: Not only is Risk a military board game, it is putting yourself into a state of danger. It’s making a situation that is not only going to cause a loss to you but possibly others.

An example of a risky situation might be playing with fire. Not only could you be burned, you may burn a house causing property damage, because you took the risk of playing with fire. Metaphorically speaking, risk is playing with fire.

Uncertainty: Uncertainty is second guessing a situation. Uncertainty is when you lack faith. A person who is uncertain is a doubter. The doubter lacks faith in themselves and others or their capacity to meet specific needs. A person who is uncertain may be uncertain about a bridge. That person is uncertain about the bridges capacity to meet the specific need of weight that the person crossing that bridge is carrying.

In conclusion, risk is putting you in a dangerous situation; uncertainty is lacking faith in a situation.

No difference between Risk & Uncertainty:

Let me look at the situation from a different angle. Risk and uncertainty go together. Besides these two there is a third unavoidable element: decision. Risk is the consequence of making the wrong decision. And because of this the decision you have to make is uncertain. The bigger is the risk, greater is the uncertainty and greater is the decision.

If no risk is involved, the decision to be taken will offer no uncertainty simply because the consequences will be of no importance at all to the decision to be taken. Hence if there is no risk, there is no uncertainty and there is no decision.

Thus, there are no differences between risk and uncertainty. They are two sides of the same coin. You cannot have one without the other. There is however the third component. If you take the said coin and flip it, flipping the coin is the decision. The third component, in other words, is you. To understand risk and uncertainty, be sure about yourself and what you want. This way you will minimize the risk and will be more certain about your decision.

Relationship between Certainty & Risk:

It would be useful to first define the relationship between certainty and risk before attempting to understand the relationship between uncertainty and risk. Given the fact that uncertainty has many different meanings in many different fields, understanding the relationship between risk and uncertainty seems most difficult without some sort of common framework from which to work from. That being said, however, I believe it is fair to say that uncertainty is the inverse of certainty. Therefore, the relationship between uncertainty and risk is the inverse of the relationship between certainty and risk.

The biological link between Fear and Risk:

For all of their stomach-turning gore, horror films and haunted houses attract people in droves. This ability of the human brain to turn fear on its head could be a key to treating phobias and anxiety disorders.

When people get scared, their bodies automatically triggers the “fight or flight” response-their heart rates increase, they breathe faster, their muscles tense, and their attention focuses for quick and effective responses to threats. Is it the nature’s way of protecting us?

If the brain knows there is no risk of really being harmed, it experiences this adrenaline rush as enjoyable. The key to enjoying such thrills lies in knowing how to properly gauge the risk of harm.

Young children may overestimate the risk of harm and experience true ‘fear.’ When it happens you see the child cling to a parent and cry, convinced there’s a very real chance of harm. On the other hand, adults may well scream but quickly follow it with a laugh since they readily recognize there’s no chance for real harm.

This phenomenon also explains why people can enjoy skydiving, bungee jumping and extreme risky sports.

In these cases, those engaging in high-risk activities will tell you that the risk is lowered by their training and precautions, enabling them to enjoy the experience. The key structure in the brain responsible for this effect is likely the amygdala, which is the key to forming storing memories linked with emotions.

The ability to enjoy risk & fear makes evolutionary sense. We’re motivated to seek out this kind of stimulation to explore new possibilities, to find new sources of food, better places to live and good allies. People enjoy deviations from the norm-a change of pace, within limits. Don’t you think risk is the most enjoyable thing in world?

If exposed repeatedly to a fearsome and risky stimulus, the brain will get used to it and no longer experience it as frightening. This is a key behind cognitive therapies for anxiety dysfunctions such as phobias and post-traumatic stress disorder, where a person’s system overreacts to perceive something as threatening when it is not.

Difference between Risk and Fear:

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble…to give way to hope, fear and greed.

It is important to know the difference risk and fear. Understanding risk allows one to take prudent chances to build wealth. Allowing fear (or lack of fear) to take over can prevent one from taking reasonable risks.

Let me illustrate the difference between fear and risk with a few examples.

Suppose we are playing a game based on a coin flip. Heads you win, tails you lose. The prize is Rs. 100/- You are required to play 10 times. How much should one pay to play the game to maintain “zero” risk? The answer is 50 cents. Over the long term, one would break even since the probability is 50/50.

Why? First, this example is not a bet – i.e. where one gets their wager back with their winnings. In this example, one pays to play, which is forever spent, and the winnings are the only return. Thus, when one pays Rs. 50/- and wins, the net winnings are Rs. 50/- Second, the statistical expected value in this game in Rs. 50/-, because a coin flip has a 50% probability of a head or tail and the payout is Rs. 100/-. Thus, risk is an estimate of the payout probability versus the cost to play.

Low risk – Long term payout greater than cost. There may be short term losses. In this example, it would be paying less than Rs. 50/- to play.

Risk Neutral – Long term payout equal to cost i.e. no gain or loss. This is paying Rs. 50/-to play.

High risk – Long term payout less than cost. In the short term, one may win. This is paying over Rs. 50/- to play.

Definition of Fear

What is fear? Using the same situation as above, here are some questions to answer that will help define fear:

If the prize was Rs. 1, would you pay 25 paisa to play?

If the prize was Rs. 100, would you pay Rs. 25 to play?

If the prize was Rs. 1,000, would you pay Rs. 250 to play?

If the prize was Rs. 10,000, would you pay Rs. 2,500 to play?

If the prize was Rs. 100,000, would you pay Rs. 25,000 to play?

Statistically, the answer should be yes. These all have returns greater than risk and one should take all these “investments.” One is guaranteed to win in the long term since the payout probability is better than the cost of playing.

However, most people stop playing at one of the higher values. Why? Because the fear of losing the higher cost to play becomes a bigger factor at higher prize values. It may be acceptable to lose Rs. 25, but not Rs. 25,000. And while the prize payout is in one’s favour, each play is not a guaranteed win. So the fear of losing once, twice or more begins to be the determining factor.

Risk and Fear with Respect to Investments

The confusion between risk and fear can become evident when people are investing. Fear or the lack of fear often causes one to make the wrong investment decision.

For example, since 1926 the stock market has averaged 10% returns. From a risk perspective, one should be invested in the stock market. Very few alternative investments have a comparable return. The long term results favour the person invested in the market. However, I know people who will not invest in stocks either due to the 2002 bear market results, or thinking the stock market is akin to gambling. Because the perceived short term losses are high, fear is causing these people not to take a good risk opportunity.

On the other hand, petty stocks are attractive to many investors. From a risk perspective, petty stocks are high risk versus the possible return, i.e. unlikely to have a gain. However, many people still invest in petty stocks because they only “invest what they are willing to lose.” Here, the lack of fear causes people to invest in these poor risk options.

Taking Risk … Scared Riskless?

Nothing ventured, nothing gained.

Chances are this tiger can’t take down an elephant by itself. And the chances are he’s going to get shot in the process. But if he can pull this off, everybody with stripes is going to be eating real good for quite a while.

That’s risk…Plain and simple.

There are all different kinds of risk. There’s reckless abandon, calculated risk, there’s rolling the dice and betting the farm. There is taking a chance and knowing you are going to lose. There is taking a chance and knowing you can’t.

Most of the risks that manage to stare us down are pretty small. There’s not much to lose and a lot to gain, but we still can’t take the risk because of perspective. We believe we are going to lose a lot more than we will. The truth is, almost anything you can imagine, but can’t do, has been done by someone else who took the risk and made it happen.

And every risk you take, no matter how small, no matter whether you win or lose, teaches you that. Here is an old advertisement clipped out of Rolling Stone a long time ago:

Too often we are scared

Scared of what people might think if we tried.

We let our fears stand in the way of our hopes.

We say no when we want to say yes.

We sit quietly when we want to scream.

And we shout with the others

when we should keep our mouths shut.

Why?

After all

we do only go around once.

There’s really no time to be afraid.

So stop.

Try something you’ve never tried.

Risk it.

Enter a triathlon.

Write a letter to the editor.

Demand a raise.

Call winners at the toughest court.

Throw away your television.

Bicycle across the country

Try bobsledding.

Try anything.

Speak out against the designated hitter.

Travel to a country where you don’t speak the language.

Patent something.

Call her!

You have nothing to lose

and everything

everything

everything to gain.

JUST DO IT.

Go on. Get out of here. Go take a risk. And I’ll promise you one thing. Maybe you won’t pull it off. But if you do, everybody with stripes is going to be eating real good for quite a while.

Fear of Loss is a real human fear and it is a powerful innate characteristic of human mind. As a matter of fact one of the closing techniques in salesmanship training is to use the “fear of loss trial close” on the buyer.

It goes something like this: “So you like this new 7 series BMW and the price is good too, you even said it yourself; how about we do a credit check and you can driver her home tonight?”

Buyer: “Oh, I don’t think so, it is a beautiful car, but I have to think about it for a few days.”

Seller: “Well, this is the last one in stock here on the East of India, she will not last by the end of tomorrow, and in fact I am surprised she is still here today. Are you sure you want to risk it?”

The fear of risk that something bad may happen if you do something or fail to do something has kept many a man from reaching his full potential.

The saying; “No Risk; No Gain” is also appropriate here, as you cannot succeed unless you push the envelope and go beyond the common accepted way of doing things or general understood limits. Without risk, we would never have put anyone on the moon. Without risk there would be no drivers in Formula 1and if there were they would all drive around the track at 55 mph, not 300 + mph.

Risk and fear is something one must overcome in life. That is not to say you take ‘foolish’ risks, it means you should live life and make all your endeavours count, do not settle for less or be led by fear or risk.

“That is all for now…I will continue this article in the next issue!”

By Dr. K. Raja Gopal Reddy, Published in Life Insurance Today, October, 2010