Risk Aversion: Playing It Too Safe With Money

Risk Aversion - © Robert Kneschke - Fotolia.comRisk aversion.  How does it play out in our financial lives?

You’re having your regular lunch out with three friends.  Someone mentions that the stock market continues to climb.  One of your friends says, “No way would I put my money in the stock market.  It’s a pure crap shoot.”

The topic shifts to a really well-priced coaching program where people are getting a great return on their investment.  And the same friend pipes up, “Not me, I’m not investing in that sort of thing.  I’ll build my business without it.”

You may be lunching with a classic Risk Averter.  Someone with an irrational need to avoid taking risk at any cost and who reacts to risk with enormous anxiety.  Whereas being conservative with money can be good, being overly conservative to the point of paralysis means lost opportunity.

This aversion does not come from a lack of will or of information, nothing that rational.  Instead, it comes from subconscious forces that are deeply rooted in our past, often without us being aware.

Risk aversion, or investment caution taken to extremes, is one of the twelve classic money behaviors. Of the three general categories these behaviors fall under (pushing money away, pulling it towards you, and using it to mess up relationships), this is in the first category.

Instead of:

a Risk Averter is so concerned about the potential for loss that she does not allow her money to pay her the dividends it could—with minimum risk.  This behavior precludes the lifestyle she could otherwise afford.

Where Does This Risk Aversion Come From?

Excessive risk aversion comes from observing authority figures in our early years, as we try to figure out how the world works.  It will typically come from events that registered as traumatic and emotionally powerful, whether they truly were or not.  That’s how we remember them.

It could be anxiety coming from our parents or what seems like ominous adult comments taken out of context.  A family bankruptcy that results in life disruptions.  Visible losses from a major investment.  Or even the impact of a gambling parent.

Historically, periods that generated waves of risk-averse people followed the Crash of 1929, the 1990s Dot-Com bubble burst and the economic tsunami of 2008.  The disruption in the lives of affected adults and children left its psychological mark.

A few things predispose us to risk aversion.  First, people are by nature afraid of loss.  For example, losing $100 has about twice the impact on us as winning $100, according to research studies.

Next, something called the “endowment effect” increases the value in our eyes of anything we own.  And this greater value makes us that much more reluctant to give it up, hence our risk aversion.

Lastly, humans prefer the status quo, or for things to stay as they are. So it’s natural to resist anything that changes the current state of affairs.

Telltale Signs of an Risk Averter

Who do you know who has tens of thousands of dollars sitting in a bank account—or even under a mattress—because she’s afraid of losing it if she invests it?  (Granted, the generous returns of pre-2008 traditional investment vehicles are harder to find these days. But her hesitation comes from fear, not from lack of excitement.)

What about the woman who talks incessantly about the bad deal she got when her portfolio lost 30% of its value in 2008.  And how she’d never reinvest what’s left to capture the upswing as the stock market recuperated and blew right past the old record highs?

Forget about your entrepreneur friend—or maybe you—who understands the role of risk and its management.  (Risk aversion and entrepreneurs don’t mix.)

Your entrepreneur friend feels the rush of endorphins as risk levels rise and “possibilities” come into play.  Your risk-averse friend will feel heart palpitations instead.

If you know anyone stockpiling food, water and bullets for when some catastrophe causes “life as we know it” to end, do you think risk aversion and fear of loss could be playing a role?

Someone’s choice of profession can also offer telltale signs of their risk profile.  Accountants and librarians are unlikely risk takers.  But hedge-fund managers are actually professional risk takers.  They are far less emotionally attached to what they’re trading than a private individual would be.  For the individual, money feels far more real–and irreplaceable.

Where Risk Aversion Leads

Not all risk taking is good, of course.  It depends upon so many factors.  But a woman who shuns taking any risk at all with her money is functioning under another form of “money rejection.”  Out of fear of loss, she will miss opportunities to make her money grow, regardless of how safe the application might be.  As a result of inaction, her money will likely lose intrinsic value due to inflation.  Or she’ll simply fail to maximize her wealth.

When old messaging kicks in about how “risky” a financial behavior might be, the resulting anxiety, fear or shame will trigger a sense of imbalance.  The natural reaction is to get rid of that awful feeling by acting at the opposite extreme to silence the anxiety, fear and shame.

In the process, perfectly acceptable levels of investment risk (say with a balanced, well-allocated stock portfolio) that offer competitive returns are pushed aside.

Money, whether hard-earned or not, is left to languish — losing value in the face of inflation.  And growth opportunities are lost.

Some confuse Risk Averters with Underspenders, but here is the difference.  The Underspender allows money to come in, but she won’t spend it easily.  That doesn’t mean that she won’t invest it, because she sees an investment as being money that is still hers.

On the other hand, a Risk Averter may be willing to spend money a little more freely, but has an emotional aversion to trusting “critical” money to third parties because she only sees the potential loss, not the possible gain.

In the end, at their extremes, they are both forms of pushing money away.  For the Risk Averter in particular, by not managing her relationship with money she “risks” having fewer resources and niceties to enjoy in her life.

Note: This is the fourth of a series of twelve articles, identifying each of the classic money behaviors that trip women up and keep them from controlling their money—and their life.  If any of these behaviors feel familiar, be sure to stay connected with me on Facebook so you can continue on this exploration.

And let us know in the Comments section below if you know anyone who fits this profile of a classic Risk Averter.


Bio: Sharon O’Day fixes financial lives. She is a tell-it-like-it-is money expert with a successful career in global finance, plus an MBA from the Wharton School. Today she specializes in getting entrepreneurial women over 50 back on their game so they can have more money, less stress and more joy. With her “Over Fifty and Financially Free” strategies, they take actions that lead to their ultimate goal: financial peace of mind.

  • Roz

    Most likely the ‘risk averter’ with money is also one in other areas of life. Finding a balance, being educated and not reacting based on emotional baggage is probably key.

    • You’re right, Roz! Emotions have their place in lots of life’s decisions … but not necessarily when it comes to our money!

  • Mike

    Great points Sharon! I know a risk averter from the perspective of over-spender but reluctant to invest. Thanks for sharing!!

    • That’s an unusual combination, Mike. I’d be surprised if the reluctance to invest would be based on fear, because true OVERspending comes from a totally different set of issues. But nothing’s impossible! 😉

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  • Alexandra McAllister

    I also know a risk averter…he over spends but refuses to take some of his money and put it aside for a rainy day. After reading your article, I can begin to understand why. Thank you, Sharon. Your articles are always so informative and an eye opener.

    • The true risk averter usually IS a saver, Alexandra. She just doesn’t invest with third parties because she’s afraid to lose what she has, so she holds onto her money in places where her money makes no money, for example. You’ll see your friend more precisely in one of the next few articles … 😉

  • Amanda James

    Sometimes taking risks is a good thing. Sometimes putting money towards something, even though it might be a bit of a gamble, can turn into a big profit in the end. But not doing so, you’ll never know.

    • You’re right, Amanda. Rarely can there be a good return on your investment if there isn’t at least a little bit of risk. Instead, the key is to measure the amount of risk one’s comfortable with … in hopes of returning the big profit you’re talking about.

  • Veronica Solomon

    I am actually a big risk taker when it comes to money and my business. If it is something I believe in with my heart I am more willing to take a risk – weighing the odds first of course

    • As I said, Veronica, entrepreneurs and risk aversion don’t mix! Just starting a business is a risk, and a good entrepreneur knows how to weigh the odds … when she “believes it with her heart.” 😉

  • Dr. Mary C Kelly

    Really important topic when investing! Knowing your risk tolerance is critical! Great article Sharon!

    • You’re right, Mary; what’s troublesome is when messaging or emotions get in the way and distort true risk tolerance levels …

  • fredmcmurray

    There are some risks I wish I had been more adverse too.

    • We all have risks we wish we hadn’t taken, Fred … but then, that’s the sign of someone who is pushing the boundaries in order to grow and prosper!

  • Tina Ashburn

    This is very interesting. I know such a person and it’s very difficult to have a conversation without the subject turning to risk aversion. Thanks for making us aware that this is “frequent” if not normal.

    • Hopefully this does start to explain why that person might be so risk averse, Tina. (All too often the person isn’t even aware because the reason is so embedded in early messaging.) And yes, it’s more frequent than we’d imagine …

  • Gina Stroud Binder

    I’m a former insurance actuary, and I appreciate the limits that risk aversion places on return. Studying for actuarial exams taught me the value of accepting and tolerating acceptable risk. We encounter risk daily in all of life – uncertainty is part and parcel of human experience. It makes sense that we should tolerate some degree of risk with our money. I look forward to future articles!

    • As you know, Gina, taking some “risk” is what offers us a way to “leverage” the money we do have. And today that leverage is needed just to compensate for the value lost to inflation. So by being totally risk averse, we end up moving backwards …

  • Yvonne

    People that don’t spend money on the things they should really reduce to quality of their lives.

    • You’re right, Yvonne. Being super-thrifty is one thing, driven by a need that is hopefully temporary. But depriving oneself of the basics is another thing altogether …

  • Sharon, I love this article! The whole time I was reading this I was thinking to myself Wow!! I’m not prone to being a risk taker, and I always wonder how some people are not afraid to take risks (when it comes to their business and financial lives) while here I am wondering what ifs…I dislike that about myself and I think it has to do with when I was growing up and seeing how my dad struggled to make ends meet while taking care of my sister and I. So instead of taking risks I tend to follow what seems to be “norm” Like going back to a 9-5 when I really would rather own and run my own business full time….Anyways I’m going on and on here, just wanted to thank you for this article!

    • Marielle, the main reason I write is so my readers can begin a dialog in their own heads about how they handle money. It gives them the opportunity to change something they’ve just become aware of … or it might reinforce a behavior they’re real happy with. Remember that, except for real extremes, there is no real right or wrong. The key is finding what works for you, as long as it offers you a path to financial security in the long run. That’s our goal!

  • Norma Doiron

    Great discussion Sharon. Yes, there needs to be a balance between spending & saving. And a lot of wisdom in between! thanks for sharing your expertise with us. x0x

  • Ashley

    It’s good to take a risk sometimes. I know some people who are like this. Very interesting topic!

    • There is always a little risk that comes with growth, Ashley, and it’s no different with money. If we want it to grow, we have to take on some risk.

  • Heather Cameron

    There definitely has to be balance between risk and safety I guess that is where calculated risk expression come from. I’ve take investment risk and some have paid off other not so much. I see that as part of trying to better my financial and business situation.

    • That IS where “calculated risk” came from, Heather. Unfortunately, some people react viscerally to any risk at all and don’t know why …

  • Robin Strohmaier

    I do know some that who fit this profile of a classic Risk Averter. I tend to be more cautious, but also realize that a little risk does come with growth. I have also seen the extremes of both. Perhaps a balance is key?

  • For a little while I was a Risk Averter. But in the past year that has changed dramatically. I understand that you have to invest to gain.
    Great post, tons of valuable information and I am looking forward to sharing it post!

  • I would not go as far as saying “no risk no gain” but there is some truth in it, it has been mentioned in the comments below as calculated risk. And after all: life is about taking risks or otherwise we would all be still dwelling in caves. Love your insights, Sharon, and keep looking out for your next posts!