What is your risk level (part 2)

Is your gut leading you astray or is it your salvation

             In this part we will look a little further at risk as it relates to making decisions and at some thoughts on the perception of risk. Risk can have an empirical basis, originating in or based on observation and testing or it can have what I will call a theoretical basis, based on guess work or perception. Assume you are an adult Scout leader out camping and want to build a fire. You know that the closer you get to the fire the warmer you get and if you stand in it there is a strong likelihood of being burned. You decide to sit near the fire but not in it and enjoy the warmth and light and also minimize the risk of falling in and getting burned. Now assume you are 20 years younger, a Boy Scout and with other scouts. Your scoutmaster has just told you not to play around the fire because you may get burned. You immediately reason with yourself that you have never fallen into a fire, been burned nor seen your friends suffer burns from a fire. Therefore you conclude that while it may get warmer as you get closer to the fire you will not get burned. So you and several of your fellow scouts decide to play a game of tag around the fire because there is plenty of light and it is easy to see one another plus as an added enjoyment it’s fun to jump over the flames as you try to catch your companions. The scoutmaster visibly ages and suggests that tag should be played somewhere else, not around the fire. It just doesn’t make any sense to you as a scout, why would you want to play anywhere else other than around the fire. Everything is completely under control. What is your risk level as an adult leader and as a Scout? How does your perception of risk change with additional observations, experience or more data?


RMS Titanic

         An additional factor relating to empirical risk relates to a false sense of security from limited observations or results. Although at the time, the observations or results may have seemed complete and conclusive. Nassim Nicholas Taleb in his book, The Black Swan – The Impact of the Highly Improbable has the following quote on page 42, “But in all my experience, I have never been in any accident… of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever  in any predicament that threatened to end in disaster of any sort.” E.J. Smith, 1907 Captain, RMS Titanic. Risk can be hidden, missed or not understood but that does not mean it is any less real. What we perceive as the level of risk may or may not be all inclusive or even sufficient to allow for a reasonable analysis. Look back to the financial crisis of 2008 and the collapse of home prices. Most thought that home prices would not only keep increasing but more importantly would not fall. Many individuals planned for the risk of home prices not increasing. The hidden risk was in not fully weighing the impact of the possibility of decreased prices. Or like our good Captain, the risk of an iceberg that could pierce several watertight compartments on a ship.
             Risk then has many facets. Are you comfortable with not only what you may know but that you likely don't know something important.