Thursday, November 24th, 2016
Most of us have a reflexive aversion to risk and a preference for certainty. This is understandable–risk entails the possibility of loss, and loss aversion causes us to weight potential losses more heavily than potential gains. Unpredictability unnerves us and makes us uneasy. The more we know about the outcome of a situation, the safer and more comfortable we feel. As a result we typically work hard to minimize risk and uncertainty, because these qualities trigger unpleasant emotions we’d rather avoid.
Emotions are essential inputs in our reasoning process, and in most cases we appropriately move away from situations and experiences that generate negative emotions. But emotions aren’t always accurate guides to the right course of action—they’re “quick and dirty signals.” The speed and power of emotions allows them to play a useful role in decision-making by helping us process massive amounts of data more efficiently than we could through logic alone. But these same characteristics also allow emotions to easily overtake our relatively slow and resource-intensive logical reasoning process, and potentially guide us inaccurately.
This often happens when it comes to situations involving risk and uncertainty. These qualities trigger strong feelings that cause us to feel unsafe, so we avoid the experiences that trigger them—but this comes at a significant price. Lower risk and greater certainty always carry opportunity costs. This is readily apparent in the financial world—the safest investments offer the lowest returns, and the biggest opportunities are also the riskiest.
So what can we do? Rather than minimizing risk and avoiding uncertainty (and incurring the inevitable opportunity costs), we’re better served by more effectively managing the emotions that these qualities trigger. Managing emotions doesn’t mean suppressing them.
The no-risk, 100% certain paths that we choose when we’re unable to manage the emotions triggered by risk and uncertainty often end in regrets. The time-tested strategy yields no real advantage, and the outcomes from the conventional and steady status will result in a whole new set of difficult emotions that must be dealt with eventually. Pay now or pay later.
Summing-up: Managing emotions takes a lot of work, and we may conclude that while it’s a laudable effort we just don’t have the time or energy for it.