This basic psychology of Risk Management changed, how I make almost every decisions in my life.
From my personal relationships to making investments in businesses I use this model to manage risk.
To manage risk you have to understand relation between speed, time and risk. These three things are connected and affect each other constantly.
In summary risk is nothing but not knowing what you are doing. (you can leave here or continue to read)
Everyone has it’s own ratio of these three variables and knowing that ratio will really help you in life.
I would call it, finding and maintaining your perfect triangle.
How to manage risk
So, let’s get started.
Risk, speed, and time.
You will always be trading in between these three variables in your life.
Sometimes you will have the choice to choose one variable and sometimes not.
But I will explain how this method will help you in every field of life.
There will always be a trade between speed and risk and this trade will always affected the time.
Information and technology for manipulation
In the examples below you will find one thing common and that is manipulation or say it technology to mold environment to your needs.
Suppose you want to go from point A to point B, but you want to reach there as fast as possible, so you increase your speed.
Now the moment you have increased your speed the risk also increased but now you will reach at your destiny fast.
But what most people do is that they increase the speed so much that instead of reaching at their destiny they meet with accident.
You don’t want to be this guy, so what you do, you try to improve your average speed as much as possible, but not enough that you can’t control it.
But you can always manipulate it, what if you travel with airplane then there is no risk right?
Nope not that easy, if you want to travel super fast with plane even the plane has to be built that way, there are so many factors like drag and heat build up at the nose of the plane.
Which can tear the plane apart, but yeah yeah, you will reach fast.
Suppose you want to earn maximum return on your investment, you will have many options to choose from.
Like government bonds which will be the safest to invest in, On the other hand investing in medical R&D companies where risk is very very high and so does the reward.
So what to do now, well it all depends upon you, you can put all the money in medical companies or in government bond to be super safe.
Nah, tell me something interesting Chitranjan, this is so boring.
Well, then get prepared to invest your money in learning first.
You have to study about business and understand basics of business and maybe start a small one just to have a taste of it.
Once you will have that information, you will be able to see workings of most of the companies and judge for yourself which company has it’s engine fully tuned.
Wait, wait we are going out of topic, well the point is that with information you will be able to judge what is risky and what is not.
We human need some level of sustainability to live our lives so I think you will want a sustainable company to invest in your money.
But the point remain the same, which one to invest in well that depends upon your situation.
My personal decision is this.
I don’t want to marry so that I can take business risk.
After all, I don’t want my children to suffer consequences of my decisions.
In the same way ask yourself what you want and will that want create problem for your loved ones.
knowing your own self will help choose the best investment.
All these businesses are vehicles to reach to your financial goals.
Do you want to travel in truck, where you move slow but strong, or do you want to travel in sports car which is fast but fragile enough to get wrecked.
Just one more case
Now suppose you have to prepare some presentation in an hour to acquire a company or not.
With limited time you have to make good calculations to evaluate that company so that you don’t sign a bad deal.
Therefore you decide to increase your speed to complete it in an hour.
The moment you will increase speed the probability of you making a mistake will increase. Remember I am not saying you will make a mistake, but the chances of making one will increase.
So how fast you should go?
How can you tell that, well one way is to listening to your emotions.
Use Emotions as a guide for taking risk
Always listen to your fear, it only comes when your brain can’t guess the consequences or when you can’t acquire the information to imagine the result of your actions.
Sometimes its useless because it gets into a useless loop. I call it the useless emotion loop For example
Suppose you are about to deliver a speech and you know your topic very well you are an expert and still you are being afraid. Whats the reason?
The reason is the desire to know what will happen, when you will be on stage and because that event hasn’t happened yet, your mind try to fill that information gap with something and most of the time that something turns out to be a negative thought.
Use fear as a benchmark, the moment fear hit you, that is the starting, you can go just above that, so that you learn new things, but not so far that you ruin yourself.
When you will increase speed, you will give away your control over risk.
lets get back to the dealing example when you were creating the report for acquiring business.
The risk in this situation is on missing out some detail which might diminish your return over this acquisition deal.
So you have to make sure that you leave some margin to embrace the impact of anything wrong. call it a insurance, a compensation for the speed you wanted.
You can use software to evaluate a company fast or you can add people to divide your work, but it is not always the right option.
You will see why in next section.
Let’s try to implement this system to other aspect of life.
Choosing the right life partner using risk management
You can’t have your best friend go on a date with your possible girlfriend. See that is why I was saying adding people is not good option all the time. (exception threesome fantasies)
Ok, so in situation the simple way to reduce risk will be to spend time with your potential partner.
If you just see a girl and get married you will later wonder, I didn’t know she/he will turn out to be this bad or good.
Yup good too, because that’s the return of taking risk.
But to reduce risk you should spend time with him or her and get open, try to find his/her fantasies, believe system and opinions about the topics you consider important.
You can go for total opposite personality which might contrast your own, but I have found that life satisfaction come from being with like minded people.
I would suggest you to go for live in relationship, this way you will know how that person actually live his/her life.
Here what might surprise you about the other person.
- They may not like to bath regularly but you do.
- They may love shopping, but you might not.
- They may like to decorate but you might like life minimalist life style.
- They may want to be with you to reduce their rent.
- They may like to keep things messy, while you like organized.
- They may hate children, while you may love them.
There are so many other small factors, which letter becomes very irritating, so the best way is to be together and see whether things work out or not.
If you are rich then the other person may behave the way you like them to be, in that case wait for even longer, until they enter a fight with you.
Most of the time anger brings some truth with it, as we loose our control to tendencies.
I don’t like marriage, but if you are looking forward to it, I would say try using this risk management strategy for much better married life.
Other aspect of life where it works
It doesn’t matter where you are in your life, you will always encounter situations like this where there will be time, speed and risk.
- Building a home fast, you might forget something which might letter delay the project.
- Getting ready for school, you might forget to take homework with you.
- Preparing food for guests, you might forget to add some ingredients.
Must have tools for risk management
Here are the things that might help you to manage risk.
Checklists: These are my number one go to things when I have to complete a very important task.
Habits: Habits are also checklist, but they just work automatically inside you. That’s why you get good at doing something after constant repetition. I convert some of my checklist into my habits, so that I don’t have to refer to them.
Due diligence: Sitting and dividing your action’s consequences into good and bad sections. This will take out all the problems of that deal, so that you can make PLAN B just in case if things go side ways.
Imagination: One of the best gift and curse of life is imagination, it allow you to imagine, how you can make something work and it can even show you how you will fail.
Try to imagine life using what if, for example what if I get this deal right or what if I get this deal wrong, what consequences I have to face and will I be able to recover from it, if yes then how.
Factors which play the important role in risk management
Well I would simply say it’s your ability to process.
The speed at which you can take an input, process it and give the output, will decide your efficiency.
Knowledge: To take a input you need some knowledge and to contemplate the input you need even more information and knowledge to process it. This can become your inefficiency.
For example you think of starting a restaurant but have no idea about running it and no experience about real estate dealing, you will end up becoming a failure.
But what if you have all that, what happens then? well in that case your ability of input and output will become the bottle neck.
You will have limited energy and limited time to serve customer at your restaurant, so you will have to add other people to process all the input that you might get.
Information, technology has been a great help to reduce risk. So find ways to use them to your advantage.
So figure out your own limit and then think how can this limit be removed from the process.