Risk 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:
- passively ignoring the existence of money as a Money Denier would, or
- pushing money away as a Money Repeller would, or
- allowing money in but not back out as an Underspender would,
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.
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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.