In the investment world, we normally think about risk as volatility or how much a particular investment fluctuates in value. In general, the more risk we are willing to take, the higher the potential reward could be in the long-term. But is that all there is to risk? Lately, I’ve been looking at risk through a different lens, the lens of trade-offs.
Every decision we make involves a trade-off, some consequence to the action we take that could be either positive or negative. We might choose more sleep instead of exercising early in the morning. We might risk getting a speeding ticket so that we can arrive at our destination earlier. It is in our nature to trade long-term benefits for short-term indulgences.
To properly evaluate trade-offs, we should slow down our decision-making process, especially when it comes to the more consequential decisions, such as health, finances, and relationships. We can’t evaluate every decision we make by dissecting it to the Nth degree. If we did that, we would never make it out of the house in the morning as we spend hours weighing the benefits and risks of brushing our teeth!
Depending on your own personality bent, you can evaluate trade-offs more accurately by asking one of the following questions:
- If you generally focus more on the negative consequences of a decision, “How could this turn out well?”
- If you generally focus on the more positive consequences of a decision, “How could this turn out poorly?”
Asking one of these questions forces you to evaluate the trade-off to your decision and balances your view. If you are thinking, “I don’t see how this could go wrong,” or ”I don’t see how this could go right,” you might not have fully considered the trade-off in the decision you are making. Stop and explore further if you can only see one side of the equation.
In the current environment, you are probably facing several consequential decisions, and you might also have a little more time to make them. I invite you to take advantage of the extra time by trying this exercise and letting me know how it goes!
