Is Risk Good or Bad?

 

Inherently, risk is neither good nor bad. The interpretation of a particular risk as good, bad, or neutral depends on the risk tolerance of the person facing the risk and on the risk premium or expected return on the risk. Risk tolerance or risk appetite depends on a person’s personality and current circumstances.

While risk is inherently neither good nor bad, risk-taking behavior can be classified as good and bad. Perhaps more accurately, risk-taking behavior may be classified as constructive versus destructive.

Constructive Risk-Taking

Risk-taking can be extremely beneficial to individuals and societies. For example, entrepreneurial risk-taking can pay off in innovation and progress. Even when a specific sought-for goal is not achieved, we learn and make progress by taking chances: many of the best lessons are the ones learned the hard way—by trying and failing. Our society was formed and advanced by risk-takers. Ceasing to take risks would quickly wipe out everything our society depends on. It would wipe out experimentation, innovation, renewal, challenge, excitement, and motivation. While there are individuals and even societies that shun risk-taking, most cultures revere risk-taking.

 

Destructive Risk-Taking

Some risky behavior is a manifestation of human weakness, or due to an inability to fit into and function within society. When motivated by such dysfunction, risk-taking may be manifested as criminal activity, drug use, addiction, and violence. Risk-taking behavior under such circumstances is often a cry for help, and warrants attention.

It's not always clear whether an individual is engaging in constructive or destructive risk-taking. Often, this only becomes clear with the benefit of hindsight. Many important human achievements were originally viewed as self-destructive by mainstream society, and the poor souls who took anti-establishment risks were often criticized, at times suffering physically. An example is the story of Galileo, who took a huge chance by insisting that the earth revolved around the sun, rather than the conventionally-held, opposite, view. For taking this risky stand Galileo was tortured by the authorities. Galileo's courage helped to inspire others to pursue a physical truth, enabling significant progress in mankind's understanding of the universe.

 

Opportunity Cost

A risk averse person may be relieved and pleased at passing up a risky opportunity. And yet, society as a whole may suffer significantly due to a lost opportunity to make progress. One of the greatest mistakes people make when evaluating risky choices in life is to forget to take into account the cost of not making a particular choice. A conscious decision not to pursue a risky goal may deprive the individual of a significant windfall. More meaningfully, it may deprive society of important progress. This lost windfall is known as the opportunity cost of the decision.

Have you ever wondered about such lost opportunities? Ever asked yourself where you'd be now if only you'd taken the risk of asking that person you liked out on a date? What about that private business opportunity you turned down? Whenever a risky venture or action is considered, it's important to assess the opportunity costs of foregoing the risky option.