Risk

Risk is the possibility of loss in the face of uncertainty.

How we speak of risk

Our lack of perfect knowledge about many aspects of the world around us means we face uncertainty each and every moment of the day. Will my favorite team win their next match? Is the veggie burger at this restaurant going to be yummy? Should I step foot alone into the dark cave lying before me at the precipice of this forlorn and windswept mountainside? You see, all normal concerns one might have.

Rather than becoming paralyzed with anxiety over this uncertainty, we humans spend a lot of time weighing possibilities and thinking through consequences (with varying degrees of skill and thoroughness). And the term we use to conceptualize the degree of danger at hand is called risk. Risk is the acknowledged and unacknowledged uncertainty present in a scenario that could lead to an unfavorable outcome.

Risk is inextricably paired with uncertainty, and it reduces as we gain a better understanding of a system, how it operates, and the direction it is headed. If we could obtain perfect clarity about how an event will turn out, the result would no longer be in question and therefore there would not be any risk. Of course, given the nature of things, this is frequently not the case.

What we stand to lose

It is also useful to think of risk in terms of the thing that is in peril of being lost. It can take the form of a resource such as money that we invest into a market or wager in a bet. The resource could be material in nature, or just as easily the promise to take on a commitment. Collectively, the resources, time and energy we possess can be thought of as our wealth.

On the same track, our status, rank or condition can also hang in the balance. This is precisely the type of risk that two elite athletes assume when they compete head to head, with the possibility that only one will prevail and be identified as the superior competitor. Unfortunately, risk also extends to our well-being, such as when we subject ourselves to the possibility of experiencing physical harm by participating in a competition that is dangerous or for which we are ill-suited. A poor result could mean more than just a loss of rank; it could damage our health.

Aside from our wealth and status, we can also find ourselves at risk of losing more than we know (or at least more than we recognize at the moment when we take a given decision). For instance, if you wager your car in a bet, superficially you have only placed the car in jeopardy. But the downstream consequences of losing your car could include losing a reliable means of transportation to your place of work, and therefore even your job itself. The full picture of the risk we assume only materializes when we also holistically consider the effects the loss may have on us.

And risk should not only be contemplated from the perspective of the individual; a community can also take on risks of its own by, say, condoning its people taking part in dangerous activities in the first place. If too many people in the community suffer as a result, the collective wealth and condition of the community will degrade.

Drivers of risk

Risk emerges when we do not have enough knowledge about a system. This can be caused by our own inexperience, or by a lack of access to relevant information.

The randomness inherent in the system also increases risk. Whether or not we are aware that a system contains more randomness, that system will still have more risk than a system with less randomness.

Finally, the quality of our judgment also impacts how much risk we assume. If we are skilled at evaluating uncertainty, we will be more cognizant of the amount and nature of the risk to which we are exposing ourselves. On the other hand, if we lack confidence in our judgment because we know ourselves to be inexperienced, if we have lost faith in our ability to make good choices, or if we are overconfident in our perceived understanding of the complexities at play, the very act of making a choice can introduce its own risk.

Being risk-averse in a risky world

We humans try to mitigate risk by:

• Improving our understanding of the system in question. If we better know how a market works or how our opponents tend to compete, we can modify our own behavior and therefore reduce our risk.
• Wagering only what we can tolerate losing. This requires us to think more deeply about the consequences of experiencing a bad result. It is a contextual assessment that can change over time.
• Cheating. By engineering the outcome through unfair means, we eliminate uncertainty and therefore remove the risk. However, cheating itself generates its own kind of risk of being caught, and that risk may require a second-order round of actions to mitigate it.

Ultimately, risk is a feature of the world in which we live, and we have many tools (some honest, others not) to assess and reduce some of the uncertainty we face. So go ahead, eat that veggie burger. But beware the hot fries.