In a classic, “How To Get Lucky”, the author, Max Gunther, writes on the poor understanding of risk-reward ratios by “born losers.”
“Not everybody is interested in lotteries, of course. But the need to take risks extends into all areas of life. Falling in love, for instance. If you want to experience the joys of such a relationship, you must be willing to take the possible hurts, too. You must be willing to make an emotional commitment that has the capacity to wound you. But it is exactly like playing a lottery: If you don't bet, you are not in position to win.
Dr. John Kenneth Woodham, a New Jersey psychologist, observes that the unwillingness to take risks is a characteristic of those unlucky people we call “born losers.” He says, “Not all losers have this risk-aversion thing, but I do see it often in the really beaten-down kind of person, the kind life has kicked in the teeth over and over again.”
He tells of a patient whom he last saw about a year ago. He calls her Louise but says that is not her real name. "The minute she walked into my office, I could guess what her problem was or, at least, part of it: She was scared to make a move. She walked and sat in a head-down kind of way, avoided eye contact, even avoided talking about herself for the first couple of sessions I mean she talked but not about what counted. She talked around things. She was afraid to take risks even with a therapist. She stayed closed up inside herself and stayed safe."
Louise's story came out slowly. "One dominant theme in her life," Dr. Woodham recalls, "was an intense love-hate-rivalry kind of relationship with a former college roommate. Louise was in her middle thirties when I was seeing her, but this painful thing with the roommate seemed to be as strong as it had ever been when they were younger. All through the years, Louise kept comparing herself with this roommate - and in these comparisons, Louise always finished last. The roommate lived the kind of life Louise wanted: you know, glamorous, colorful, varied, and interesting. She had all the good successes, the great jobs, the grand passions with men. Louise envied her, hated her, then hated herself for being envious.”
Louise's life was gray and dull by comparison. She had lived with her mother in a suburban town. Years ago her roommate had suggested that they share an apartment in Boston, but Louise had found that too risky a proposition. Louise had a boring but secure job with an insurance company near her suburban home. She did not want to leave that corporate womb and look for a new job in Boston. What if nobody wanted to hire her? How would she pay the rent on that apartment? She would have to borrow. But then, suppose it took her a year or more to find a job with a big enough salary. What would she do then? How would she ever get out of debt?
She was so acutely worried about losing that she was unable to place a bet. Later, when the roommate was about to start a small business of her own and invited Louise to join her, Louise was again unwilling to take the risk.
The same problem stifled her relationships with men. Since it is never possible to be 100% sure about another person we have just met, every new relationship requires us to take a chance - sometimes a big one, sometimes a small one. Louise was never willing to place even a small bet. Dr. Woodham is not perfectly certain about this, but he suspects men found her unnecessarily suspicious, tense, and unresponsive - not the kind of woman with whom the average man would want to spend his Saturday nights.
Louise's roommate didn't win all her bets, any more than Lula Aaron, the lottery player, won all hers. But the roommate did place herself in position to win, and that positioning paid off. She ended up as the owner of a successful business, modestly wealthy, free to travel at will, married to a man she loved. Louise ended trapped in a life of loneliness and boredom.
One of Louise's difficulties evidently was that she lacked skill in assessing the risk-reward ratio in her life's important situations. Either that, or she didn't understand the need to make such an assessment. All risks looked equally daunting to her.
That is a recipe for poor positioning in the world of luck. It is essential to study risk-reward ratios. When a given risk is small and a potential reward large, you might as well take the risk and so position yourself to become a winner.
A risk may be "small" either in terms of its size or in terms of the odds against you. A simple example of a small-sized risk is a bet in a state lottery. You plunk down a dollar. The odds against you are huge. In all likelihood you are going to lose that dollar. But since it is so small an amount, and since the potential six-or seven-figure prize is so big, you can justify taking the risk. As Lula Aaron noted, you can justify it on the basis of fun alone.
For an example of a risk that is “small” in terms of odds, consider the act of putting your money in a savings bank. The looked-for reward is the interest you expect the bank to pay you, and the risk is that the bank will fail with your money trapped inside it. If it fails the Federal Deposit Insurance Corporation is supposed to reimburse you. It may do so, but only after a long delay and with no interest. If a lot of banks fail all at once in some world economic collapse, then there will be a “run” on FDIC, and it, too, will fail. In such a catastrophe, you probably will lose every dime of your deposit.
But the risk of that unhappy outcome is very small. This situation is exactly the opposite of the lottery bet. The reward you are seeking - the bank interest - is small. But the odds against you are also small. Thus even though we may be talking about a big amount of money - your life savings - you can still consider the risk to be "small" and so can justify it.
Not all situations are so clear-cut, of course. Indeed, few situations are. Life is a muddle of fogbound choices. One trait of the consistently lucky is that they are able to assess risk-reward ratios even amid this confusion and ambiguity.
Somebody like Louise, lacking this skill, may well come to see all risks as pretty much alike. If a possible course of action involves any degree of risk, then it is to be avoided.
A risk avoider like Louise will therefore shun gambles in which the risk is really quite small. For example, there was Louise's refusal to leave a secure job and go job hunting in Boston. In this case the potential reward was big, a grand package of assorted goodies: a better job, more money, more excitement, new kinds of fun in the city environment, and so on. Risk was involved and that risk frightened Louise off.
But what was the risk? It was really not so big. The worst likely outcome was that she would be jobless for a few months. She would then have had to use up savings and perhaps borrow for living expense. Not a calamity, just an inconvenience. She would not disappear off the face of the earth. There are no debtors' prisons in America. She would not be allowed to starve while down on her luck. Moreover, there were fairly good odds that this down period, if it happened at all, would last only a few weeks. As an able young woman with good job skills to offer, she was not likely to wait long before an employer took her off the market.
It was a gamble worth taking. It might have led to a big win.”