The 2 ways to think about risk.

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People who make a fixed salary often ask people with an unpredictable income, “how can you stand not knowing what you’re gonna make every month?”

Then, the person with a volatile income often responds, “how can you stand knowing?”

Both attitudes capture one of the ways people think about risk. Risk makes us uncomfortable: we like knowing what’s gonna happen, so we can make plans.

But at the same time, if we don’t take any chances, we can never hope to get anywhere in life. Life is inherently uncertain, and if you only pursue things that are certain, you’re gonna miss out on a lot that the world has to offer.

Plus, risk is kinda fun: salesmen love having uncapped income, limited only by how much they can sell, simply because it’s thrilling. And it’s motivating to know that your income will naturally grow as you get better at what you do.

So, how should we think about risk? Is it better to gamble, or play it safe?

That depends on the context, of course. There are a couple different ways to think about risk. They both make sense in different situations, and someone who understands variance and uncertainty will usually employ them both.

How a chess player thinks about risk.

In chess, one wrong move can lose you the game. If you blunder a piece, or you weaken your position too much, it could be game over — even if you play the rest of the game perfectly.

Plus, whenever you make a bad move, your opponent will usually punish you for it right away. There’s no luck involved, and there’s almost no chance you can get away with a mistake.

This means chess players have to be very careful. Before every move, they have to ask themselves, “if I make this move, what’s the worst thing that could happen?”

In other words, playing chess is about minimizing downside, rather than maximizing upside.

How a poker player thinks about risk.

In poker, you can’t avoid risk. It’s inherent to the game — trying to play poker without taking risks is like trying to walk without your legs.

So instead of trying to minimize downside, poker players try to maximize their “expected value”. That means they ask themselves, in the long run, if I played like this all the time, would I make or lose money?

To be good at poker, you have to learn to tell the difference between a good risk and a bad risk, and then you have to take as many good risks as you can.

Bankroll management.

Poker players also learn to tell the difference between acceptable and unacceptable risk. Pro poker players practice “bankroll management”: they set aside a certain amount of their money as “poker money”, and then they gamble using only that money.

They also follow a certain rule: never wager more than a certain amount of your bankroll on anything, period. If you risk too much, you could seriously cripple yourself — even if the upside’s incredibly high.

When thinking like a chess player can hurt you.

Sometimes chess players need to take risks — especially when they’re underdogs.

For example, for two World Chess Championship matches in a row, every single game ended in a draw. Then the reigning champ, Magnus Carlsen, won in a “speed chess” sudden death match.

Carlsen’s easily the best speed chess player in the world, so if the match goes to a tiebreaker, Carlsen’s almost sure to win. So if you’re the underdog, facing Carlsen, then you have to take a chance at some point, and make a unique move to throw the game into unknown territory.

You might win the game, and you might lose the game, but taking a chance gives you much better odds than just drawing all 14 games and getting crushed in a speed-chess tiebreaking round.

Doug Polk, the 3-time World Series of Poker bracelet winner, asked chess grandmaster Hikaru Nakamura on his podcast, “Why don’t chess players take more chances in situations like these? Why don’t they say, ‘Well, I’m gonna lose if this thing goes to sudden death, so I’ve gotta take a shot now’?”

“That’s just not how chess players think,” said Nakamura.

When thinking like a poker player can hurt you.

Playing poker requires incredibly high levels of discipline. Humans aren’t naturally very good at risk management, so unless you have Zen-Buddha-like control of your mind, you’re gonna slip up at some point.

That’s part of the reason why there are so many stories of poker players going broke. Gus Hansen, for example, was once a great poker player and had millions to his name. He lost most of it, and today holds a job as an accountant.

Even worse, many poker players die prematurely. Stu Ungar, the three-time World Series of Poker Main Event champ, developed a huge drug addiction and died.

Even if it doesn’t kill you or bankrupt you, poker can chemically affect your brain. Some players get to a point where they just need “action”. Without something on the line, they get bored.

Once, a poker commentator told a story of playing golf with Phil Ivey, who’s often considered the greatest poker player of all time. They were playing $100 a hole — which was a lot of money, for the commentator.

But for Phil Ivey, it was chump change, and it just wasn’t enough to stimulate him. “I need more”, he said, so he called a friend of his and bet $10,000 that he would make par on the next hole.

How should you think about risk?

When it comes to your physical safety, you should think like a chess player. If something bad happens to you, it can be game over, just like in chess. So when you go through your life, you should generally try to minimize downside risk to your health.

But when it comes to your money, it’s best to think like a poker player: look for acceptably small risks that you think will pay off in the long run, and take them. That’s because if you’re not willing to risk, you’re gonna miss out: you have to spend money to make money, after all.

Running away from economic risk, in the 21st century, leads to lower quality of life. If you’re not willing to quit a job you don’t like, you’ll be unhappy. If you’re not willing to invest your money in something risky, you won’t beat inflation. And if you’re not willing to start a business, you’ll never stand a chance of becoming financially free.

How do people think about risk?

The human brain has been evolving for millions of years. But markets have existed for only a few thousand, and capitalism didn’t reach anything resembling its current form until at least the 1900’s.

That means our brains aren’t well-tuned to understand the risk profile of markets. We simply didn’t evolve to be able to easily understand the stock market, or decide whether or not to invest in a business

However, we’re very finely tuned to risks involving our health, because our ancestors faced those every single day.

Which might explain why people are so risk-averse when it comes to money. We evolved to think about risk like a chess player, which means it’s hard for us to think about risk like a poker player. That means we don’t like the feeling of losing, and so we (mostly) shy away from anything with a downside.

Taking more money risks.

“Regular people are afraid to lose money,” says Robert Kiyosaki in Rich Dad, Poor Dad. “But that’s the wrong attitude to have. Every rich person loses money sometimes.”

The point is, if you’re not taking small, calculated risks with your money, you’re leaving something on the table.

Always protect yourself from ruin, of course — don’t bet what you can’t afford to lose. But beyond what you need to survive, you should view your money like poker chips. You should take low-risk gambles with potentially high rewards. Sometimes you’ll lose, but you’re likely to win in the long run.

Hi! My name’s Theo, and I write an article like this one every Monday about something I think is interesting.

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https://medium.com/@theo.seeds/the-2-kinds-of-writing-a909aca24ba5

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