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The Risk Spectrum
Fostering Mutual Respect for Diverse Risk Tolerances
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In my close-knit group of college friends, our shared passion for golf serves as both a recreational activity and a platform for friendly competition. Yet, amongst us, there's always one individual who adds an extra layer of excitement to the game—our resident betting enthusiast.
For him, the thrill of the game is heightened by the prospect of a substantial wager, transforming a leisurely round into a relatively high-stakes affair. He claims he would rather shoot a mediocre (abysmal) score of 90 and emerge victorious in the money game, than achieve an impressive score of 72 and suffer defeat in the money game.
Conversely, my own approach to betting leans more towards indifference. While I can appreciate the occasional flutter of excitement that comes with a betting game, I derive equal—if not greater—satisfaction from the intrinsic challenges of the sport itself. Golf, to me, is a personal journey of self-improvement, an ongoing battle against one's own limitations. Therefore, introducing the element of competing against others with money on the line only serves to intensify the pressure.
What continually intrigues me, however, is the recurring debate that ensues amongst us, fueled by our vastly different levels of risk tolerance. Each member of our group brings their own unique perspective to the table—one with a high tolerance for risk, another more moderate, and myself, leaning mostly towards risk aversion.
Our discussions often resemble a tug-of-war, with the avid bettor advocating for a collective embrace of his audacious risk appetite (read: degeneracy) and us on the other side of the rope who enjoy vetoing these attempts. It's a scenario not unlike a young financial advisor tempting an elderly client to venture into unfamiliar investment territories like crypto.
Seeking to shed light on the underlying dynamics of risk-taking behavior, I recently introduced my betting enthusiast friend to "Deep Survival: Who Lives, Who Dies, and Why" by Laurence Gonzales. This insightful book explores the psychological and physiological responses that determine survival outcomes in life-threatening situations.
Gonzales posits that humans are naturally drawn to moderately stressful situations, as these challenges foster optimal conditions for learning. However, the knowledge gained from such experiences tends to be encoded primarily in emotions rather than rational thought. The brain's fear center reacts swiftly to new stimuli, often preceding logical reasoning and leading to impulsive actions—akin to the phenomenon of panic selling during market downturns.
The book struck a chord with my friend, whose appetite for adrenaline-inducing experiences mirrors the survival instincts explored by Gonzales. Throughout our friendship, his fondness for thrill-seeking activities like cliff diving and ice climbing has been a constant reminder of the diversity of risk tolerance within our friendship circle.
Some studies have suggested that genetics may also play a role in shaping risk-taking behavior, but it's just one piece of the puzzle. Factors such as upbringing, environment, and life experiences also exert significant influence.
Our risk tolerance, much like our personalities, is fluid and subject to change over time—as shown evident in my highly unscientific X poll.
Do you find your behaviors toward money and investing becoming more risk-averse or risk-tolerant as your net worth and savings grow? Why?
— Ramp Capital (@RampCapitalLLC)
3:05 AM • Apr 7, 2024
In my personal journey, I’ve noticed a shift towards increased risk aversion with age. This transformation partly stems from a sense of fulfillment on both physical and emotional fronts, where material wealth no longer correlates with increased happiness. As a result, my objectives now revolve around maintaining my current state of contentment and ensuring the well-being of my family.
In the end, our differing attitudes towards risk can be likened to the analogy of boiling water: while some may soften under pressure (potato), others emerge hardened and resilient (egg). Understanding and respecting these differences is essential in navigating the complexities of interpersonal dynamics and aligning our individual risk tolerances.
Whether we’re teeing off on the golf course for a high-stakes game or witnessing someone gain generational wealth off of a memecoin, let’s keep in mind the timeless wisdom of the boiling water analogy. In doing so, we can foster mutual respect for the diverse risk tolerances within our circles, embracing each individual’s distinct approach to navigating life’s uncertainties.