The 3-Step Guide To Becoming An Intelligent Risk Taker

Beat the crowd by approaching things backwards

Intelligent risk-taking is essential to making any progress in life. Unfortunately, most people are left groping around in the dark, trying to figure out exactly how to do it.

This is because decision-making is hard. Good decision-making does not come naturally to us.

Understanding doing it, however, is not so hard.

I’d like to walk you through three steps that will give you tools applicable to decision-making in every corner of your life.

1. Gather your information

This might seem obvious, but without this step, the next two steps ultimately cannot produce results.

When you are deciding and taking a non-trivial risk, you need to make sure that you have as much information about the situation as possible. This likely means doing some research.

The key is to avoid becoming emotionally invested in the information you are gathering. You are merely doing reconnaissance. Picture a detective drawing their magnifying glass over all the clues, holding off on a conclusion until the appropriate time.

This shouldn’t be a revelation, and yet it is simply stunning how seldom people take this approach.

Chances are you have a friend who has suddenly invested over the past year. What do you think the likelihood is that they thoroughly understand any of the businesses that they are now partial owners of?

There are many books and podcasts and YouTube videos available, there is no excuse for blindly placing money. No one is forcing them to invest before they are ready.

Yet people behave like this in many situations. It is simply much easier to decide based on a small amount of information that points to where you want it to, rather than a decision based on a comprehensive account that requires delaying gratification.

Many times, getting high-quality information means the decision falls into place for you. In your detective work, you might uncover a bit of information that makes the right choice clear.

This is a skill though, as it is not always apparent which information applies to your decision-making. A rule of thumb, only exclude information if you know definitively that it is superfluous.

Taking investing as an example again, you need to collect all the information that applies to a specific business succeeding in the future. Information about their finances, their management, the place they occupy in their industry, the product/service they offer, etc.

The gathering of extensive information can take a long time. Since we are impatient creatures, this means many of us will bypass this step.

Don’t delude yourself, risk-taking with incomplete information is gambling. You aren’t learning; you are relying on luck.

2. Work to disconfirm what you want

This is the stage where we turn things on its head. We do this to avoid confirmation bias.

The Nobel-Prize-winning psychologist Daniel Kahneman talks extensively about this bias in his book Thinking, Fast and Slow. For Kahneman, two systems comprise our brain. System 1 is responsible for automatic and easeful cognition like intuition or driving while focusing on a conversation. And System 2 takes care of more effortful and deliberate cognition, like multiplying 57 by 66 or writing a medium post.

Confirmation bias happens when System 1 goes awry. According to Kahneman,

‘The confirmatory bias of system 1 favours uncritical acceptance of suggestions and exaggeration of the likelihood of extreme and improbable events.’

This means that when we are trying to take intelligent risks and make good decisions, our quick System 1 brain jumps to looking at evidence that supports the conclusion we favour, exaggerating the likelihood of the desired event.

So, how do we get around this?

The answer is by going backwards.

Imagine your worst enemy comes to boast to you about this foolproof new idea that they have. It is going to make them rich and they are already wanting you to know how much better than you they are.

Imagine now how you would wrangle every brain cell you had to prove their idea wrong. You would tackle it from every angle conceivable. Not just content to show they are wrong once, you would want to list reason after reason of why this will not work.

This is the type of thinking you must use for your ideas if you want to take intelligent risks.

If you can do this for yourself and find you cannot disprove your thinking, then you are doing well. Better yet, also find someone who isn’t your biggest fan to do the same.

To make sure an idea isn’t faulty, you must stress-test it. If at any point it snaps, you are lucky: you just saved yourself from failure.

3. The postmortem

Now that you have pushed your thinking as far as it will go, you must assess where it leaves you.

Depending on the decision you are making, there is a different amount of risk that is allowable. You need to understand how much you can and should tolerate.

Often, if you are stress-testing your ideas properly, they won’t be entirely without doubt. If you cannot correct these issues, you now have to weigh them against the pros and cons of either acting or doing nothing.

During the process of the first two steps, your line in the sand for risk should have become more clear.

Be wary that at this point it can tempt you to weigh things other than the results of your deliberation. You are likely still emotionally attached to one of the outcomes and may feel an urge to disregard what the evidence tells you by making a gut decision. This would be a mistake.

To be clear, it can at first seem pessimistic to look for all the negatives in your or someone else’s logic. It isn’t.

Showing yourself or another that you care enough about how a situation unfolds by trying to avoid an unnecessary risk is an act of kindness and love.

Once you have weighed the results, you can move on with a course of action, remembering that new information could emerge along the way to pushback on your position.

In summary,

• Gather as much information as possible, as objectively as possible. Think like a detached detective.
• Imagine you are your worst enemy and work to disprove your thinking.
• Weigh the results: can you tolerate the risk of everything blowing up in your face?

If you found this useful, please consider sharing. You can find me at www.joshuacronkhite.com.