{"id":47344,"date":"2021-08-22T08:26:00","date_gmt":"2021-08-22T12:26:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=47344"},"modified":"2021-09-02T12:43:33","modified_gmt":"2021-09-02T16:43:33","slug":"anticipate-risk","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/anticipate-risk\/","title":{"rendered":"How to Anticipate Risk in a Random World"},"content":{"rendered":"\n<p>Are you a good judge of risk? What factors do you take into account when trying to anticipate risks involved in a project or an endeavor?<\/p>\n\n\n\n<p>According to <a href=\"https:\/\/www.shortform.com\/blog\/nassim-nicholas-taleb\/\">Nassim Nicholas Taleb<\/a>, the author of <em><a href=\"https:\/\/www.shortform.com\/blog\/nassim-taleb-fooled-by-randomness\/\">Fooled by Randomness<\/a><\/em>, most people are poor judges of risk because they do not fully comprehend the power of randomness. As a result, they harbor misguided beliefs about risk that lead them to <a href=\"https:\/\/www.shortform.com\/blog\/make-bad-choices\/\">make poor decisions<\/a>.<\/p>\n\n\n\n<p>In this article, we&#8217;ll look at the characteristics of people who fail to anticipate risk properly and discuss specific things you can do to anticipate risk mindfully.&nbsp;&nbsp;<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\"><strong>How Our Misguided Beliefs Lead to Failure<\/strong><\/h2>\n\n\n\n<p>Traders\u2014and others in fields affected greatly by randomness, such as economics or politics\u2014often have the same set of qualities that lead them to misevaluate risk and make poor decisions:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>They are overconfident in their beliefs: <\/strong>They don\u2019t see that what worked for them in the past may have worked because of coincidence. They don\u2019t see that analysis of past events obscures the random element of it. Traders who blow up typically think that they were such experts that the risk of failure was non-existent. When traders take risks under such a misbelief, it\u2019s ignorance, not courage, that drives them.&nbsp;<\/li><li><strong>They don\u2019t think ahead: <\/strong>They don\u2019t plan for their strategy to fail and they act emotionally to pressure. If the market falls, they may start buying more stocks simply because they panic, not because of a predetermined strategy.<\/li><li><strong>They don\u2019t stay the course, or they stay too long: <\/strong>Sometimes traders vacillate between short-term and long-term strategies because they react emotionally to noise they should ignore. Other times they stubbornly ignore noise that has turned into meaning, choosing to ride out a sinking market instead of cutting their losses.&nbsp;<\/li><li><strong>They think too simply:<\/strong> Trained to boil arguments down to their most simplistic forms, they are unprepared for the greater complexity that governs the randomness and probabilities of the market. Simplicity works for many business matters like the logistics of bringing a product to market, but it does not work for matters that have more mathematical complexity and cannot be simplified.&nbsp;<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>How to Avoid Failure in a Random World<\/strong><\/h3>\n\n\n\n<p>To avoid developing the misguided beliefs above and thus avoid failure, remember that success built on hard work and smart choices is more lasting than that built on luck. Therefore, try to avoid accumulating success that relies on luck. <strong>Be aware of the ways your instincts and emotions blind you to the roulette wheel. Prepare for risks and don\u2019t expose yourself to losses you wouldn\u2019t be able to handle.<\/strong> <\/p>\n\n\n\n<p>Some specific thoughts on how to develop this mindset follow.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Anticipate Your Emotional Reactions<\/strong><\/h4>\n\n\n\n<p>It is hard to act rationally when we have irrational biases driving us, even when we know better. We often know how we\u2019re <em>supposed<\/em> to act, but we act impulsively anyway. The problem is not lack of knowledge, it\u2019s poor execution.&nbsp;<\/p>\n\n\n\n<p>As humans, we are pre-programmed to react emotionally to stimuli. The best\u2014and often only\u2014way to prevent our emotions from clouding our judgment is to eliminate the triggers that activate them. For example, if you can\u2019t control your cravings for chocolate, your best strategy would be to simply not keep it in your desk. In the same way, limit your exposure to market triggers.<\/p>\n\n\n\n<p>To prevent unnecessary emotional reactions to noise, limit your exposure to the daily barrage of information available to you: Don\u2019t read the market reports, don\u2019t watch television, and don\u2019t scroll through online finance analyses. Insulate yourself from small shifts that might grab you emotionally and cause you to make rash moves.&nbsp;<\/p>\n\n\n\n<p>Set some parameters for your data so that you are only alerted when the market makes relatively large moves, the size of which you specify in advance. (Keep in mind that changes are not linear in their significance. A 2 percent change is not just twice a 1 percent change; it is more like 4 to 10 times, depending on the specifics of the numbers. Determine your threshold for significance with this in mind.)<\/p>\n\n\n\n<p>Essentially, filter noise the way an engineer filters background static from a phone call. A phone\u2019s technology detects sounds that have small changes in amplitude, pegs them as noise, and filters them out so that only sounds with significant changes in amplitude are delivered to the listener. Without such technological help, our ears have trouble picking out the voices from the noise. In the same way, our brains have trouble picking out important changes from noise, especially when we are also being bombarded with \u201cexpert\u201d advice.&nbsp;<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Don\u2019t Think Like a Bull or a Bear<\/strong><\/h4>\n\n\n\n<p>Don\u2019t focus on whether the market will rise (as in a <em>bullish<\/em> market) or fall (as in a <em>bearish<\/em> one); focus instead on the impact that either movement will have on your results. Correctly predicting small market movements might earn you small gains, but hedging against large drops or rises can be much more profitable.&nbsp;<\/p>\n\n\n\n<p><strong>Aim to make money from <a href=\"https:\/\/www.shortform.com\/blog\/rare-events\/\">rare events<\/a><\/strong> rather than from slow and steady bets; rare events\u2014either positive or negative\u2014tend to be more profitable in the long run. Act like a <em>crisis hunter<\/em>: someone who keeps alert for unusual opportunities or unlikely threats, and plans to profit off either accordingly. Crisis hunters are the ones shorting the market to anticipate a large drop, or buying options in the hopes of an unlikely price jump. Even if those scenarios are less <em>likely<\/em> than market stability, they can pay much more handsomely and are therefore worth seeking out.&nbsp;<\/p>\n\n\n\n<p>For example, if you judge the market has an 80 percent chance of rising, but would only rise by two percent, but if it falls, would fall by 20 percent, you\u2019re better off shorting the market and betting on the fall, as doing so will earn you higher returns.&nbsp;<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Be Aware of Your Superstitions<\/strong><\/h4>\n\n\n\n<p>Superstitions are an innate part of the human psyche: People instinctively look for connections between unrelated objects, events, or patterns and tend to be more primed to accept a hypothesis than to reject it. Therefore, if we are presented with a hypothetical possibility that our good fortune is caused by something like what we ate for breakfast that morning or a quirky market strategy we used, we are more likely to consider it than to dismiss it outright.&nbsp;<\/p>\n\n\n\n<p>Though you may associate superstitions with <a href=\"https:\/\/www.shortform.com\/blog\/cultural-myths\/\">cultural myths<\/a> passed down from your grandparents, most people harbor at least a few superstitions that lead them to find causal links between two unrelated phenomena\u2014like a certain pair of shoes bringing you a good trading day. These are sometimes referred to as \u201cgambler\u2019s ticks.\u201d&nbsp;<\/p>\n\n\n\n<p>Avoid being driven by such meaningless superstitions. Don\u2019t look for connections where there are none\u2014accept the random nature of your profession and resist attaching importance to unimportant things. Examine your attachment to your lucky pair of shoes or to an odd strategy, neither of which is actually lucky.&nbsp;&nbsp;<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Don\u2019t Stay Wedded to Your Positions<\/strong><\/h4>\n\n\n\n<p>One trait common in traders who stay successful over the course of years is their willingness to change their positions at any moment. George Soros is renowned for it; he\u2019ll talk bearishly about the market and then suddenly buy bullishly.&nbsp;<\/p>\n\n\n\n<p>We referred to \u201cpath dependence\u201d earlier when discussing how early success affects later success. To refresh, path <a href=\"https:\/\/www.shortform.com\/blog\/maturity-continuum-7-habits\/\">dependence<\/a> describes when a series of events unfolds in response to an initial, dominant event. In practice, it means that unless we consciously choose otherwise, we tend to be driven by the decisions we\u2019ve already made, such as a decision to take a particular trading position.&nbsp;<\/p>\n\n\n\n<p>This trait probably evolved to ensure a continuous society instead of one where people wake up every day and choose a different spouse, job, and kids. In the negative, though, it can mean a person does not question her emotional investment to a decision even when evidence shows she should.<\/p>\n\n\n\n<p>This problem runs strongly in industries outside investing. For example, a scholar rarely suddenly contradicts all of her previous research. In fact, we say she \u201cdefends\u201d her thesis; it would be unusual for her to change her position in the middle of her doctoral interview.<\/p>\n\n\n\n<p>In the world of trading, this can be seen when traders continue to double down on losing positions, insisting that their strategy will one day be proven correct. It often leads to a blow up and an exit from the industry.&nbsp;<\/p>\n\n\n\n<p>Instead of admitting they were wrong and incorporating the lessons they\u2019ve learned into their understanding of the world, the trader blames market forces. It\u2019s hard to admit that everything we\u2019ve believed in and worked for up to this point has been wrong. But a better strategy is to acknowledge that you sometimes make mistakes and then incorporate the lessons you learn from those mistakes into your future decisions. Once you become comfortable accepting your fallibility, you\u2019ll be better able to change your position if signs indicate it&#8217;s the wrong one.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Some Final Notes on Randomness<\/strong><\/h3>\n\n\n\n<p>Sometimes randomness is an acceptable\u2014even desirable\u2014part of the human experience. Outside of matters of survival, such as making a living through investing or other means, randomness can enhance a person\u2019s life. For example, poetry is constructed of random-sounding phrases, and in fact, a computer-generated poem can often sound just as lyrical as a human-generated one. But within the world of business, minimizing\u2014or on occasion, harnessing\u2014randomness is a crucial element to building lasting success.&nbsp;<\/p>\n\n\n\n<p>We don\u2019t have control over the random events that happen to us. The best we can do is plan for them and react appropriately when they inevitably happen. Anticipate the risks you can predict, and allow room in your plans for those you can\u2019t. Keep in mind that no matter how much you plan, randomness will always be ready to strike. Bear this in mind and react with dignity to the rare events that inevitably hit you:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Greet misfortune with stoicism: a combination of wisdom and courage.<\/li><li>Face the future with an optimistic yet accepting attitude.&nbsp;<\/li><li>Don&#8217;t act like a victim. Don\u2019t show self-pity.<\/li><li>Be courteous to those below you; be forgiving of those who contributed to your misfortune.&nbsp;<\/li><li>Remember that the only thing luck does not control is your attitude.<\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Are you a good judge of risk? What factors do you take into account when trying to anticipate risks involved in a project or an endeavor? According to Nassim Nicholas Taleb, the author of Fooled by Randomness, most people are poor judges of risk because they do not fully comprehend the power of randomness. As a result, they harbor misguided beliefs about risk that lead them to make poor decisions. In this article, we&#8217;ll look at the characteristics of people who fail to anticipate risk properly and discuss specific things you can do to anticipate risk mindfully.&nbsp;&nbsp;<\/p>\n","protected":false},"author":7,"featured_media":45755,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[9,160],"tags":[474],"class_list":["post-47344","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-psychology","category-science","tag-fooled-by-randomness","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How to Anticipate Risk in a Random World - Shortform Books<\/title>\n<meta name=\"description\" content=\"Most people are quite bad at anticipating risk because they do not fully comprehend the power of randomness. Are you a good judge of risk?\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How to Anticipate Risk in a Random World\" \/>\n<meta property=\"og:description\" content=\"Most people are quite bad at anticipating risk because they do not fully comprehend the power of randomness. Are you a good judge of risk?\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/\" \/>\n<meta property=\"og:site_name\" content=\"Shortform Books\" \/>\n<meta property=\"article:published_time\" content=\"2021-08-22T12:26:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-09-02T16:43:33+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/s3.amazonaws.com\/wordpress.shortform.com\/blog\/wp-content\/uploads\/2021\/08\/man-thinking.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"901\" \/>\n\t<meta property=\"og:image:height\" content=\"562\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Darya Sinusoid\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Darya Sinusoid\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"8 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/\"},\"author\":{\"name\":\"Darya Sinusoid\",\"@id\":\"https:\/\/www.shortform.com\/blog\/#\/schema\/person\/0421cce75bc249b11e2517b3a91f9c46\"},\"headline\":\"How to Anticipate Risk in a Random World\",\"datePublished\":\"2021-08-22T12:26:00+00:00\",\"dateModified\":\"2021-09-02T16:43:33+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/\"},\"wordCount\":1762,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/#organization\"},\"image\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2021\/08\/man-thinking.jpg\",\"keywords\":[\"Fooled by Randomness\"],\"articleSection\":[\"Psychology\",\"Science\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/\",\"url\":\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/\",\"name\":\"How to Anticipate Risk in a Random World - Shortform Books\",\"isPartOf\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/anticipate-risk\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2021\/08\/man-thinking.jpg\",\"datePublished\":\"2021-08-22T12:26:00+00:00\",\"dateModified\":\"2021-09-02T16:43:33+00:00\",\"description\":\"Most people are quite bad at anticipating risk because they do not fully comprehend the power of randomness. 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