'Cautious' or 'Courageous'?

Understand Your Risk Preference, and Make Better Decisions

Is this your style?

Decision making affects everything you do. From the moment you wake up, you're making decisions. Everything, from what you wear to what time you leave for work, requires a decision, however small. And inherent in almost all the decisions you make is an element of risk.

To make the best decisions you can, it is important to understand how you approach the decision making process.

For each decision you make, there are unknown elements that you can't control. Consciously or subconsciously, you evaluate these unknowns and the potential outcome of each alternative when you take a decision. However, the payoff and the risks involved are not absolute: They're estimated, and are therefore colored by your perception. In turn, your perception is strongly influenced by your propensity to take risks.

By nature, some people are more tolerant of risk than others. We all know people who thrive on big risks. People who gamble or take part in off-piste skiing are typically pretty risk tolerant, as are those who invest in new markets and emerging technologies. To them, the excitement and potential rewards make the risk worthwhile.

Before they participate in these activities, though, they make a decision to do so. This then implies that decision making is affected by your risk profile. When you're amenable to risk, you tend to consider and embrace riskier options. People who need more stability and control tend to choose far less risky options.

Understanding your Risk Propensity

So, in thinking about your decision making, you need first to understand your attitude to risk. Are you risk averse, a risk taker, or does it depend on the situation? The amount of risk you accept in your decisions is related to your overall risk profile. Some people are simply more cautious by nature. So what the cautious decision maker deems high risk, may have a lower risk assessment when analyzed by the "courageous" decision maker.

This is important because we all have to take risks in our life if we're to achieve our full potential, and it makes sense to try to find the middle path between suffocating caution and reckless optimism. The ability to find this middle path, to be able to take risks intelligently, is a great advantage in many business situations.

Research has shown that your personality type is a good way of predicting your risk propensity. Click here to find out more about a good approach to personality typing, and to take a quick self-test that will help you understand yours.

People fall into three groups when it comes to risk propensity. Some people are through-and-through risk takers. Not only do they thrive on the sensation of danger, they actively seek out this thrill. In terms of personality type, they will tend to have high Extroversion and Openness scores, and low Agreeableness, Natural Reaction/Neuroticism and Conscientiousness scores (see the personality types article to find out what this means.) These people like to have fun, enjoy the "buzz" of novelty and danger, and aren't too worried about what others think of them.

People with the opposite personality scores (Introverts with low Openness, but high Agreeableness, Natural Reaction/Neuroticism and Conscientiousness) will normally be risk averse.

The third group contains those whose propensity to take risks depends on the situation. These people tend to have mid-range scores on most of the "Big Five" personality dimensions. Their approach to risk tends to differ across following the six main areas:

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