Risk is really in the eye of the beholder. All of us take multiple risks each day, although we rarely recognize them as risks, as such. When we cross the street, we are taking a risk, although we regard that not as much as a perilous trip as the achievement of a goal, namely to get to the other side. And so it is with other things we do. I have logged millions of miles flying on airplanes, fully aware of the danger posed by such transportation. In fact, I reluctantly admit that I have always been a “white-knuckled” flyer, and for some. Very good reasons. Among them: (1) I do not understand aerodynamics; (2) it seems to me to be unnatural to be flying at 30,000 feet above the earth’s surface; and (3) I have a profound fear of heights.
But my rational self tells me that flying is safer than most forms of transportation, that the odds of an accident are very low, that pilots are well trained, that there are built-in safety precautions, and so on. And, so, while I still have a fear of flying, I am also willing to fly because it is the only practical and expedient way to get from one place to another when traveling long distances. Even the events we enjoy during our leisure involve risks. A tennis player risks twisting an ankle; a golfer shooting for the green risks going into the trap; a baseball batter risks being hit by the pitch; a bridge player risks going down at his contract because his bid is too high; a gardener risks losing an eye from a stray tree branch. In an attempt to make money, there are similar risks. Having a job implies a risk of losing the job; owning a business includes the possibility of the business failing.
On and on we could go—essentially everything we do involves some risk. But we do what we do because there is also a reward in one form or another, and most of the time we focus on the task at hand rather than the associated consequences. So, too, should be the case as far as the investment of money is concerned. There is a risk in every investment decision and action, but there are also potential rewards. The only true method of analyzing risk is to couple the degree of risk to the degree of reward, a statistic commonly known as the risk- reward ratio.
