Everyone has their own level of tolerance for risk. This can vary with the situation and opportunity, but in general, people have various degrees of risk tolerance. To be a transformative leader, you need to understand your own tolerance for risk.
If you like a lot of risk, you may need to balance your instincts with people around you or approvals and processes that can add needed perspectives before making major decisions. The same goes if you avoid risk. In this case, you may need people to push you out of your comfort zone to pursue needed opportunities, even if they feel risky.
The following is a simple online test you can take to give you some initial feedback on your personal risk tolerance.
This test is confidential; the results are simply added to general research on risk. The test gives you a numerical result indicating your normative risk profile for financial investments. This knowledge can help as you do your own financial management as well as make general decisions on risk. As you will learn later in discussions on emotional intelligence, self-control is an area of emotional intelligence that ties to risk management for you as a leader.
Complete the online test.
Were the results what you expected, or were you surprised? Understand yourself as you set up your investments and make major decisions.
✓ < 18 = Low risk tolerance (Conservative Investor)
✓ 19 – 22 = Below AVG
✓ 23 – 28 = Average/Moderate
✓ 29 – 32 = Above AVG
✓ > 33 High risk tolerance (Aggressive Investor)
Most people have a healthy understanding of risk in the short term. When crossing the street, for example, you would no doubt speed up to avoid an oncoming car that suddenly rounds the corner.
Humans are wired to survive: It’s a basic instinct that takes command almost instantly, enabling your brain to resolve ambiguity quickly so that you can take decisive action in the face of a threat. That same instinct can be a real issue for you as you look at risk in the complex world of today.
Leaders cannot avoid taking risks; they are what propel innovation, design, wealth, and growth. But every trade has a seller and a buyer-your state of mind is paramount. If you are in a risk-averse mental framework, then you are likely to interpret a further fall in stocks as additional confirmation of your sell bias. If instead your framework is positive, you will interpret the same event as a buying opportunity.
The challenge of investing in a stock or a business is compounded by the fact that our brains, which excel at resolving ambiguity in the face of a threat, are less well equipped to navigate the long term intelligently. Since none of us can predict the future, successful investment requires planning and discipline.
Unfortunately, when reason is in apparent conflict with our instincts-about markets or a “hot stock,” for example-it is our instincts that typically prevail. Our “reptilian brain” wins out over our “rational brain,” as it so often does in other facets of our lives. Typically, investors trade too frequently and often at the wrong time.
One way our brains resolve conflicting information is to seek out safety in numbers. In the animal kingdom, this is called “moving with the herd,” and it serves a very important purpose: helping to ensure survival. But moving with the herd is usually not what you need as a leader analyzing a complex situation.
As behavioral economists have documented, our propensity for herd behavior is just the tip of the iceberg. Kahneman and Tversky, for example, showed that people who were asked to choose between a certain loss and a gamble, in which they could either lose more money or break even, would tend to choose the double down-that is, gamble to avoid the prospect of loss-a behavior the authors called “loss aversion.” Building on this work, Hersh Shefrin and Meir Statman, professors at the University of Santa Clara Leavey School of Business, have linked the propensity for loss aversion to investors’ tendency to hold losing investments too long and to sell winners too soon. They called this bias the “disposition effect.”
But risk aversion can be even worse. Winning and losing is all part of the risk process, especially as an entrepreneur. Sometimes you do not know until you try-it’s a risk, but if you do your homework, the reward can be worth it. As an entrepreneur, you lower your risk by convincing investors that you are a safe risk. Next, you have to give them a plan that shows how after they put up the money, they will get their money back and a return for the investment. Launching a business, launching an innovation, making a capital investment, and buying a stock all have risk. What you need to weigh is whether the potential payoff is worth that risk.