What are the pros and cons of risk aversion when making life decisions?

Jason just received some money from his father! But now he’s looking at his bank app and wondering: “What do I do with this?”

He’s got two options:

1. Play it safe: Put the money in a savings account. The returns are low, but it’s guaranteed money.

2. Be adventurous: Invest in stocks. He might make a lot more money, but he could also lose some. 

What would you do? And what do you think Jason should do?

Now, if you chose Option 1, you probably like security, stability, and staying in control. This is called risk aversion. If Option 2 is your choice, you probably enjoy taking chances to win bigger rewards, and you're not as risk averse.

You've likely been in situations similar to Jason’s in your everyday life when you had to make difficult choices.

Do any of these sound familiar to you?

• You buy expensive travel insurance when you go on a holiday.

• You prefer a low paying but secure job over a high paying job where chances of being laid off are higher.

• You prefer to be an employee with a guaranteed bi-weekly paycheck to being an entrepreneur with an uncertain but higher income.

These are everyday examples of when you prefer certainty over uncertainty, even if the uncertain option could yield a better outcome.

Risk aversion describes the 'preference people have when they choose an outcome that’s certain over one that’s uncertain.'

In other words, risk aversion what you do when you’d rather have a certain result than an uncertain one.

Is it wrong or bad to be risk averse? Certainly not. How ready you are to take risks depends on how well you can handle them, and this is different for each person.  

Risk aversion has its own advantages.

• Fewer negative consequences: You don't engage in harmful behaviors like smoking or rash driving that could cause harm or damage.

• Stability and security: You often make safer choices and are more likely to have stable careers, finances, and relationships.  

• Reduced stress: You might have lower anxiety and emotional strain.

And it has its own disadvantages.

• Missed opportunities: You might miss out on opportunities for career or personal growth.

• Stagnation: If you're over-cautious, you might not grow or be happy with your life. 

• Feeling of regret: Risk aversion might cause you to regret missing out on opportunities, rewards, and valuable experiences later in life.

You're always taking a risk when you make any decision in life — whether it's driving your car, trying a new restaurant, travelling to a new country, buying a new home, or getting married!

If you think risk aversion is preventing you from fulfilling your life, here are a few strategies you might want to try:

1. Start small.

Try taking small risks. For example, distribute your investments in some high-risk and some low-risk opportunities.

2. Think of what would happen if you did not take the risk.

Would you live to regret it? Would you feel unhappy or stressed? Would you feel stuck and helpless?

3. Do your best.

Before you make any major decision, do your due diligence. For example, if you want to start a new business venture, thoroughly research your ideas, create a budget, seek professional advice, have a backup plan, and a safety net for yourself if you fail.

Control what you can, and accept what's not in your control.

Your good friend Harry, who lives in Buffalo, has been offered an exciting career opportunity in NYC! Harry and his wife Hannah have a great life in Buffalo. Both have good jobs and have the support of friends and family. At the same time, Harry will get better pay and exciting growth opportunities in NYC.

Harry wants to take the least risk possible and isn't too sure what he should do. He asks you for some advice.

Here are three options for Harry. Which one would you suggest?

Option 1: You have a perfect life in Buffalo! Staying is definitely the best option.

Option 2: Speak with Hannah and see what you both want. She might be interested in better opportunities and want to move, too. And you might someday regret not taking up this opportunity.

Option 3: Just go for it! I’m sure everything will work out.

What if you were faced with an important life decision? How should you deal with risk aversion to make a decision?

Follow these steps: