Risk Taking Frameworks

The general consensus is, the younger you are, particularly if you're single, the more risks you're able to take on. Conversely, the older you are, especially once you have a family, the less risks you're able to take because you have real responsibilities to be concerned about.

I've had countless conversations about risks with friends over the years and I've always circled back to a handful of frameworks I use when deciding if a risk makes sense regardless of what stage of life you're in. While everyone has a different comfort level, I find these frameworks to be helpful in shaping some of the thought process behind whether a risk is worth taking or not.

Regret Minimization Framework

The first on our list is one that Jeff Bezos, founder of Amazon, came up with that he calls the Regret Minimization Framework. As the story goes, Bezos graduated from Princeton and eventually ended up working at a new Hedge Fund making good money. Early on, when he had the idea for what would become Amazon and was weighing on the decision to pursue Amazon or to stay at his cushy Hedge Fund job, he asked himself which decision would he regret more.

He knew that in forty years, he would never look back and ask about what promotions he might have gotten or if he had moved into management if he had decided to stay at the Hedge Fund. However, he would always wonder what would have happened to Amazon if he chose never to pursue the idea. That thought haunted him and that would have been the decision he would have regretted more. So he chose to move out West and pursue Amazon and the rest is history.

What's The Worse That Could Happen?

Truthfully, if the idea behind Amazon didn't work out, Bezos could have always found another job. As humans, we tend to overthink and dramatize what's the worse that could happen if we made the wrong choice but often times, the worse that could happen is we get a rejection or we waste time and/or money. If you can minimize the risk of wasting time/money, such as validating an idea before starting, or get over the fear of rejection by accepting people saying no is not all that bad, there is little to fear. This helps reduce risks and anxiety and allow us to more purposefully pursue risks we otherwise would be unwilling to take.

Asymmetrical Bets

Lastly, the last framework that often helps shape my thinking around risks is whether I am making an asymmetrical bet or not. That is, does the rewards far outweigh the risks. If I can minimize my risk and within reason believe that I can 20x or 100x my outcome, then the risk is worth taking.

This isn't always true. For example buying a lottery ticket is very low risk and if you won the lottery, it certainly would be an asymmetrical bet type outcome, but the odds are also incredibly low. You have to consider the odds of success and the kind of risk you're taking. But in general I find that most people don't consider asymmetrical bets as part of their decision making, only the outcome or goal they are in pursuit of.

Having an asymmetrical bet type outcome along with low or minimized risks can easily help shape your thinking around risks you're willing to take. Combine this with the other two assessments, and you'll quickly conclude whether the risk is worth it.