There's a discrepancy between how the average person defines risk and how the finance industry does--and if you don't reframe your thinking, you could end up getting seriously disappointed. 

That's according to Carl Richards, a seasoned money advisor, writing in his recent column for The New York Times. Financial advisors, he explains, see risk in quantifiable terms: Risk describes variables, but those variables exist within known limits.

Risk is also characterized by uncertainty: If you get into a car crash, that's the risk you incurred by driving on the freeway. If your business goes bankrupt, that's part and parcel of the risk you took in pursuing entrepreneurship. As the famed Virgin Group founder, Richard Branson, puts it: "In the end, you've got say, 'Screw it, just do it'...and if you fall flat on your face, pick yourself up and try again." 

Sure, approaching risk can be easy at the beginning, when you and your investors are bright-eyed and bushy-tailed about the economic prospects. The real problem comes when you perceive your advisors as having accounted for the unknown: "I'm...betting that if you heard a term like 'risk management model,' you really thought, 'uncertainty management model.' Unfortunately, no financial firm offers uncertainty management," Richards writes.

A company like Vanguard could never have accounted for the 2008 economic recession, nor could Branson have predicted the October 2014 crash of his Virgin Galactic spacecraft.

The solution is not to change your definition of risk, argues Richards, but rather to own up to the fact that your advisor's definition is different.    

Ultimately, you can't account for uncertainty. You can, however, manage your expectations the next time you take a risk, and control your behavior after the fact. As Branson recently wrote on the heels of the team's disaster: "What I'm proud of is [what] the whole Virgin Galactic team [has] done in being so positive in pulling together and looking forward."

So while you can't plan for every eventuality, you can control your reaction to them. And if your investment does go down in metaphorical flames, you can at least choose to have the resolve to start fresh. 

Published on: May 13, 2015