Why understanding risk is essential to living the way that you want.

Risk is in everyone’s mind at the moment, but that doesn’t mean they understand what it is or how it works. That’s the main reason why so many people, including some supposed experts, constantly get into a mess. Here’s how to avoid joining them.

Risk is one of the most misunderstood ideas in the world today—especially the business world. Despite all the time and effort devoted to risk evaluation and risk management, corporations constantly find themselves subject to far greater risks than they imagined.

The reason for this is rather simple: they confuse risk with probability and try to deal with it primarily by statistical or mathematical means.

Probability is, indeed, numerical. It’s the study of the likelihood that some event or outcome will happen—an attempt to understand the inner workings of chance.

Risk is something quite different. The easiest way to describe it is to say that risk is simply a substitute for knowledge.

How are risk and knowledge linked?

The more you understand something, the less risk is associated with it.

Suppose you want to see your favorite team win the next time you go to a match? What’s the risk that you’ll be disappointed?

The more you know about your team, the more certain you can be about the outcome.

Probability could tell you the odds of your team winning, given their recent record. But knowledge can go much further. If you know that the opposing team is a weak one, its star player will be absent, and its coach was fired two days ago, you’re already well on the way to being fairly certain of the result. Add your knowledge that your own team is the best in the league, will be at full strength, and hasn’t lost a game in 4 months, and you can see the risk of being disappointed is minimal.

Can you eliminate all risk?

Unfortunately not. Nothing in this world is a total certainty—not just because there is an element of randomness in nearly everything, but because our knowledge is never absolute. Even natural laws cannot be treated as lacking any risk, though they come as close to complete certainty as makes little difference. The law of gravity isn’t likely suddenly to stop, though there is, I suppose, always the theoretical possibility that it could.

If knowledge and risk are more or less opposites, it’s clear that having greater knowledge about anything is going to greatly lessen the risks that go with it. The more you know, the less risk you need to take.
Why does this matter?

Throughout life, people constantly find themselves facing the necessity of making decisions in circumstances they know very little about.

That’s why life is risky. It’s peoples’ lack of knowledge or understanding in key areas of of their lives. They must choose, yet lack enough knowledge to do so with any degree of certainty. Sometimes the requisite knowledge simply isn’t available; sometimes they don’t know where to find it; sometimes they haven’t tried to look; sometimes there isn’t time anyway.

So what do they do? The decision has to be made, so they make it.

In most cases, they do so by falling back on some pretty risky substitutes for knowledge:

  • They do what everyone else does, in the erroneous belief that there is safety in numbers. The media encourage this myth by treating opinion as fact. “80% of people believe this,” they say, with the strong implication that it must therefore be correct. “Chosen by 93% of consumers.” There was a time when 100% of living humans believed the earth was flat. Go figure.
  • They follow some folk-saying or rule of thumb. I guess the assumption here is that such sayings must contain some truth to have lasted so long. Maybe so, but it might well be precious little.
  • They stick as closely as they can to what they’ve done before. It isn’t nature or conviction that makes most groups of people conservative. It’s ignorance and fear. Ignorance increases the risk that any change might go wrong and fear makes that possibility appear terrifying. The more ignorant and fearful the group, the more conservative they will be.

There’s only one way to manage risk

Knowledge is the only answer to risk. That’s why learning is so precious: it takes away a great deal of the risk we would all face otherwise. The greatest benefit of modern science is neither medical advances nor soaring productivity: it’s the ability it gives us to live in a world that no longer contains a massive proportion of the daily risks confronted even by our recent ancestors.

Of course, sometimes no knowledge is available and you have to wing it. Or your knowledge stops at a critical point. But, even then, knowledge in principle—conceptual knowledge—can help you to make educated guesses.

Making educated guesses

A little while ago, I wrote an article on how to recognize a civilized organization. A reader took me to task, writing that my ideas would work only from the inside, not if you were seeking a job.

They would undoubtedly work best from the inside, since more knowledge would be available. But they would still work for recruits, provided you used knowledge in principle to make some educated guesses.
The greater the knowledge and education people have—and, critically, actually use—the better they tend to handle risky situations.

Why? They take just as many risks—only those steps don’t look very risky to them. Their conceptual knowledge minimizes the riskiness.

That’s why haste, arrogance, denigration of thought, and reliance on rules-of-thumb—all the hallmarks of Hamburger Management—are at the root of so many of today’s problems. It’s self-induced ignorance, which produces self-induced risks. The macho fools leap in, believing taking risks makes them into instant entrepreneurs.

If you want to lower the risks in your life, and increase its stability and focus, simply slow down, think more, and learn all you can.

There’s no other way.

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