Taking risk is putting one’s vulnerability on the line. To most people it is inherently distasteful. Yet risk is practically in every action (or inaction) we take, whether it concerns our investment, reputation, or situations of practical business interest. Peter Drucker says, “People who don't take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.” In other words, risk is unavoidable.
In today’s complex business environment, risks facing corporate managers and investors are often systematic and global in nature. Shocks tied to unexpected market and geopolitical events (examples: Europe’s sovereign debt crisis, Fed’s tapering of easy money, political unrest in emerging markets, upheavals in Ukraine, etc.) could have instant and dramatic impacts on the outcome of financial and business decisions. Echoing one investment manager in Chicago on the wild swings in emerging markets recently: ''… you've got to be prepared for a total shift in the market outlook from day to day. We have no idea where things are going, you're taking big risks'' (quoted in the Sydney Morning Herald, 3/9/14).
The 18th Century Dutch-Swiss mathematician Daniel Bernoulli demonstrated in his famous St. Petersburg Paradox that rational considerations would render most people risk averse when they ponder actions with uncertain outcomes. Peter Bernstein, writing in Against the Gods, summarizes it this way, “if the satisfaction to be derived from each successive increase in wealth [or reputation or something else] is smaller than the satisfaction derived from the previous increase in wealth, then the dis-utility caused by a loss will always exceed the positive utility provided by a gain of equal size”. In a risky bet, therefore, a zero-sum (fair) game is a loser’s game in utility terms. The rational person would prefer a risk-free alternative to a bet with the same expected payoff, and take the bet only if the expected payoff exceeds the risk-free alternative (i.e., its certainty equivalent). In other words the rational person is risk averse.
How should a risk averse person deal with risk that is unavoidable? Interestingly but not surprisingly, the Scripture can help. Although the Bible does not speak directly to modern risk management, it offers valuable insights on the same topic that modern investment science has made big strides in unmasking its nature. The modern insight is to quantify risk as the probable extent to which realized outcomes deviate from the expected. The biblical parallel lies in the understanding of sin as missing the mark (God’s perfection). Let’s visit how the Scripture may be helpful in our thinking about risk-taking by applying what I called the BRAVO rules:
- Boundaries – Just as God’s laws, laid down in Scripture or written on our hearts, set boundaries for moral behavior (Rom. 2:15, 7:7), so ethical standards, secular laws, and the moral code built into our conscience work to restrain risk taking that could beget costly outcomes. The Holy Spirit’s ministry of restraint (2 Thess. 2:7), in particular, helps believers to steer clear of not only outright trespasses (e.g., fraud and manipulation) but also subtle urges, such as those lured by the promise of hasty gains, to probe the boundaries of ethical conduct in opportunistic behaviors (e.g., conflict of interest abuses, machinations, etc.).
- Real (intrinsic) value – Laws and restrictions offer a manual of what is allowable, but not what is optimal. “All have sinned and fall short of the glory of God,” Paul declares (Rom. 3:23). Knowing God’s expectation, the real standard of righteousness (Mt. 5:48), is the only way to gauge our transgressions. Analogously in risk taking, we need to set sight on the venture’s real (intrinsic) worth, not on anything driven by emotive overdrives such as speculation, greed, lust, pride or fear. As Yogi Berra once said, “You’ve got to be careful if you don’t know where you’re going, because you might not get there.”
Our history is littered with lessons from market, corporate, and leadership failures resulting from high stakes risk-taking (the housing crisis of 2007-8, smoker health cover up by the tobacco giants in the 1970-80s, President Clinton’s sexual indiscretions, to name just a few). Most of them could have been averted if the expectation was anchored on the real value of each undertaking – the value derived from a rational assessment of what would be the eventual outcome based on facts and truth. Paul’s advises offer divine wisdom here: “Finally, brethren, whatever is true, whatever is honorable, whatever is right, whatever is pure, whatever is lovely, whatever is of good repute, if there is any excellence and if anything worth of praise, dwell on these things” (Phil. 4:8).
- Adjustment – Believers are sensitive to sins because they are convicted by God’s Spirit living in them (Jn. 16:8). In response, they make lifestyle adjustments to avoid grieving the Spirit through confession (1 Jn. 1:9), reflection (Rom. 12:2), and perseverance (James 1:2-4). They become more Christ-like (the optimal outcome) as a result.
There are good lessons here for risk-taking. Behavioral scientists tell us that over-confidence is often behind overly optimistic expectations (and thus disappointments) in risky bets. Then when people are faced with the prospect of loss, they become aggressive in taking risk in a bid to avoid the loss. The outcome could be very different if one can wake up to destructive passion-driven behavior (confession), rationally reassess the opportunity in light of past results and present facts (reflection), and stay focused on long term (intrinsic) value despite intervening jolts and swings (perseverance).
- Vulnerability – The Scripture offers a best practice in dealing with sin: be diligent and discerning about our vulnerability (Mt. 26:41, Rom. 7:20, 2 Cor. 13:5, 1Tim. 2:22). Knowing our weaknesses allows us to deal with sin in a proactive manner. As C. S. Lewis writes (in God in the Dock), “In each of us there is something growing, which will BE hell unless it is nipped in the bud.”
Similarly in risk-taking, our ability to achieve desired objectives is significantly influenced by our emotional and physical ability to absorb the shock of disappointments. Risk makes us vulnerable, and our risk tolerance helps define what we can expect to be the proper risk-reward trade off. Knowing our risk tolerance is the only way to tell how much risk we can handle and which venture is out of our comfort zone. Financial planners and behavioral scientists have formal tools that can precisely assess a person's comfort level for risk given the demographic and unique personal circumstances, but more accessible tools are also available on many personal finance websites for free (e.g., https://njaes.rutgers.edu/money/riskquiz/).
- Objective – Biblically the problem of sin can only be solved by walking in the Spirit instead of walking in the flesh (Rom. 8:4). In other words, the “I” in SIN needs to be replaced by the “O” in SON (the Savior Lord Jesus). Jesus is the only fulfillment of God’s requirement of perfection and righteousness, and so He is singularly the necessary and sufficient solution to the problem of sin. Surprisingly removing the “I” takes away the selfish motives and fleeting passions such as fear, guilt, pride and greed which often snare us into excessive risk-taking. Even in taking risk, the believer must remember we are stewards of God’s resources. As in all our behaviors, the only worthy objective is to glorify Him, not to gratify our sinful desires. As Paul reminds Christians in Col. 3:23, “Whatever you do, do your work heartily, as for the Lord rather than for men.” Keep the right objective in focus and everything else will fall into place.
Ernest P. Liang teaches finance and economics and directs the Center for Christianity in Business at Houston Christian University. Before HCU, he spent 25 years as economic consultant and senior financial executive with Fortune 100 and investment advisory firms. He can be reached at email@example.com.