I usually find this image when searching for “Risk Takers vs. Risk-Averse” images online.
The link between risk and finance seems to be impossible to overcome in the common way of seeing these related topics.
This is the main reason why I decided to write this deep dive about the different types of attitudes that we can adopt towards risk. I have always been intrigued by the idea of developing a comprehensive and detailed article on this topic because I want to end this year with this analysis.
In this way, the structure of this post will follow this logic:
- Risk attitudes types.
- A new interview format that I am introducing this year.
- Risk-taking behavior from a psychological point of view.
1. Risk Attitudes Types
There are three main types of risk attitudes that individuals can adopt: risk-averse, risk-neutral, and risk-seeking.
- Risk-Averse: Risk-averse individuals prioritize certainty and security. They tend to avoid situations with uncertain outcomes, even if those situations offer the potential for higher rewards. They prefer safer options with predictable, albeit potentially smaller, payoffs.
- Risk-Neutral: Risk-neutral individuals make decisions based on expected value, disregarding the level of risk involved. They evaluate options solely on the potential return, without factoring in the probability of loss.
- Risk-Seeking: Risk-seeking individuals actively seek out situations with higher risk, driven by the potential for greater rewards. They are comfortable with uncertainty and are willing to accept a higher probability of loss in pursuit of substantial gains.
We can list a couple of examples to make this list even more concrete when it comes to career changes:
- For instance, a risk-averse person may prefer a stable job with a reliable paycheck over starting their own business, even if the business could potentially earn more. An example could be someone working a comfortable corporate job who decides against launching their own startup, even though the startup could lead to higher earnings. The risk-averse person may be content with their current lifestyle and unwilling to jeopardise their financial security, even if it means forfeiting the chance at greater rewards.
- A risk-neutral person considering a career change might thoroughly research and analyze the potential upsides and downsides of the new role. They would objectively evaluate factors like salary, job security, growth opportunities, and work-life balance. The risk-neutral individual would not necessarily avoid the career change if it offered greater potential rewards, but they would not pursue it solely based on the excitement of the unknown either.
- Conversely, a risk-seeking person might be drawn to high-stakes investments or entrepreneurial ventures with the chance of significant financial gain, despite the inherent risks. For example, a risk-seeking individual may decide to quit their stable corporate job to launch their own startup, even though the startup has a high failure rate. They may be willing to take out loans, invest their life savings, or seek venture capital funding to finance the new business venture.
2. Four questions for Carlo: a dear friend, temporarily based in Asia (Manila), and his definition of risk
You can listen this interview with the interactive podcast generated by NotebookLM.
My goal, for this year is to bring new formats, like this one, or video recorded interviews that can provide a tangible value to the ones that are going through them.
If you are a student at the end of the university program, a young adult in the middle of a career change process, or even a mature person curious to explore how the Millennials are thinking about specific topics, be my guest.
Starting today, I will bring to the attention of everyone the most valuable asset we can invest in: our network.
This is the first time ever I have brought this interview format on my website thanks to my close friend Carlo Tullio who agreed to answer the questions you will read below about risk.
Let’s begin!
L: What is your definition of risk?
C: “I believe that risk is what can go wrong on the journey that takes us from where we are, to where we want to be.”
L: What’s the most significant risk you’ve taken in your career so far?
C: “At the age of 25, after two years in the automotive sector in Italy, I decided to decline an interesting professional opportunity in my home country to embark on a new journey in the UK. Moving to London without a job and with mediocre knowledge of English was a risky decision for me at the time, but without that jump, I would not have lived and worked in three counties within two continents in the last 7 years.”
L: How did you balance risks and opportunities in your daily decision process over the last 5 years?
C: “The way I approach risk-taking hasn’t fundamentally changed over the years. I always look at two factors, what I can gain/learn from taking a risk, and what I could lose/miss if I don’t. A crucial factor in my decision-making process is time horizon. My willingness to take risks increases when I believe that I can achieve gains/new skills that will last in the long term and will help me to achieve my goals.”
L: What advice would you give to someone about managing risk in their life?
C: “To define the level of risk that you want to apply to your life as well of career I would advise to first define your purpose. If you understand your Why, the How, and the What will come with it, and this will help you to set your risk appetite. Of course, it is easier said than done, that is why I am a fan of biographies and asking people who achieved what I am seeking, how did they get to where they are. You will see, that to achieve results, risks need to be taken. The good thing is that you can set both, goals and risk appetite.”
3. Risk-Taking behavior: the psychological perspective
The preceding section outlines the basic categories of risk attitude. However, understanding why people adopt these different attitudes requires delving into the psychology of risk-taking.
Several factors influence an individual’s risk tolerance, as identified through decades of psychological research:
- Personality Traits: Marvin Zuckerman’s pioneering work on “sensation-seeking” traits (1979) demonstrated how certain personalities are predisposed to risk-taking. His Sensation Seeking Scale (SSS) remains a cornerstone in understanding how traits like impulsivity correlate with risk tolerance. Costa and McCrae’s research (1992) through the Big Five personality model also showed how traits like Openness to Experience strongly predict risk-taking behaviors.
- Cognitive Biases: Daniel Kahneman and Amos Tversky’s Prospect Theory (1979) revolutionized our understanding of how cognitive biases affect risk perception. Their work revealed how the “optimism bias” leads people to systematically underestimate personal risks while overestimating potential gains. Ellen Langer’s research on the “illusion of control” (1975) further showed how people overestimate their ability to control outcomes in risky situations.
- Emotional State: Antonio Damasio’s “Somatic Marker Hypothesis” (1994) demonstrated how emotions are integral to risk-related decision-making. Research by Jennifer Lerner and Dacher Keltner (2001) showed that specific emotions like fear and anger have distinct effects on risk perception and choice.
- Situational Factors: Paul Slovic’s “psychometric paradigm” (1987) revealed how risk perception varies dramatically across different domains. His research showed why people might be risk-seeking in financial decisions but risk-averse in health matters. Herbert Simon’s work on “bounded rationality” (1955) explained how environmental constraints shape risk decisions.
- Past Experiences: Albert Bandura’s Social Learning Theory (1977) highlighted how past experiences with risk shape future behavior through observational learning and self-efficacy beliefs. Less recent work by Joseph LeDoux on emotional memory (2012) has shown how past risk outcomes create lasting neural patterns that influence future risk assessment.
This rich foundation of psychological research helps explain why individuals differ so markedly in their approach to risk, and why the same person might show different risk attitudes across different contexts or times in their life.
Final thoughts to begin the year with after this post and one special mention
To conclude this post I want to mention one of the greatest basketball players ever existed, Micheal Jordan, because his words are strictly connected to another concept I want to explore more this year: failure.
“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”
I have been playing this beautiful sport during my entire adolescence and I met Carlo because of it. We have one year gap but we were able to play and train together for a couple of years too.
His crystal-clear talent immediately led him away from home, which is why I chose to interview him.
I knew I was gathering the ideas and opinions of someone who had experienced before many others the feeling at the center of this article, that propensity to experience things that can make us grow.
I am a strong believer that life is a continuous learning experience.
Taking risks (or not) is an essential part of it.
It’s up to us, every time.
Enjoy it!