This is a short chapter from my Lifestyle book on Risk and Risk Aversion

You are somewhere on the continuum between risk taker and risk averse. If you are too risk averse and conservative you limit your ability to make decisions and therefore you limit your ability to succeed. In my experience most kiwis are somewhat risk averse. I have also noticed that those who take controlled risks in career, business and investment are generally the most successful.

There is a similar concept to risk aversion called dollar fear. This is when the pain of losing $1 is greater than the pleasure of making $1. This fear often paralyses people when it comes to investment. They would rather put say $20,000 in the bank at 3% interest than invest the money in a rental property. Over time money in property always increases in value faster than money in the bank, but some people fear the possibility of losing any of the money. Similarly, some people will not risk say $2,000 to start a business even though the upside (money they could make) is hundreds of times higher than the downside ($2,000).

This brings us to the next point – always protect the downside. It is far easier (and more profitable in the long run) if in any financial decision you protect or limit any losses. Let’s say you have $5,000 to your name. If you set aside $3,000 to start a new business then that is all you can lose. Providing you do not sign any personal guarantees on loans or leases etc and providing you limit your spending to $3,000 you cannot lose any more. Yet your business might be earning you $50,000 a year in two years time. It helps to concentrate on the potential upside and allow yourself to risk the funds you have put aside.

If you are very risk averse and this is affecting your decision-making, start small and get some confidence by taking small risks. Alternatively change your mindset by concentrating on what you are missing out on by not taking a controlled risk.