Emotions Ignite, 11 10 2025
Risk is a captivating topic. I am fascinated by why some embrace risk, while others shun it. My personal experience with smoking and investing gave me some insights into both. After I stopped smoking, I began to wonder how intelligent and sane individuals can smoke despite knowing that it is a proven health hazard. Likewise, I wonder why I choose a conservative investing style for the last two decades despite seeing the crazy bull market run. Having explored the domain of risk management professionally in my career as the Corporate Treasurer of large corporate, I am able to relate commercial risk taking with personal habits too. What is common to both is human nature that triggers action.
Risk awareness and risk taking is not just about intellectual knowledge but emotional experiences. Damage does not drive action, but outrages do. Shockingly, humans are like frogs who do not jump out of water being boiled; they need to be thrown into boiling water for them to jump out of it. You can validate this by asking many smokers who have stopped as to what triggered it. We will find that it is emotions that ignite, while intellect is ignored.
Risk mitigation, even at an intellectual level is a distinct five stage process. Of sensing the latent risk, to its hazy perception, leading gradually to its visibility, before being acknowledged, and finally being managed. The pace at which we pass through these five stages depends on our sensitivity. Some are only sensitive to their own pain, while others learn from pain they see around them.
Latent risk is mainly felt but not seen. A novice and expert are both hyper-sensitive to risks. While the novice’s sensitivity comes from inexperience, the expert’s sensitivity is insight led. Often the first few experts who talk about latent risk are liable to be dismissed as a novice or behaving like a novice.
Perceived risk is when there is a hazy perception felt by more people. Yet, it is vague and cannot be clearly described. It is attributed to a gut feel and a sense of discomfort. But as discomfort levels rise their buzz moves from periphery to centre stage.
Visible risk is when the first signs of damage emerge. The early risk perceivers are now heard and have a growing and attentive audience. This amplification draws in risk management experts and the victims sharing their experience of damage catch attention and are painted in gory details, triggering emotions. This brings risk into the centre stage and focus for all to see and respond.
Acknowledged risk is when the decision makers, regulators and law makers debate the alternative course of actions and propose mitigation plans for consideration.
Active risk management starts when conscious decisions are made on risk, to minimize exposure, outsource it, or insure it. A critical factor in this decision making is the judgement on competence to manage risk and the rewards of risk taking. Where it is a “pure” risk, i.e. no gains from taking it, only losses, the easiest option is to avoid it. But when unavoidable, insure it by paying a premium. On the other hand, where the risk is “speculative”, i.e. successful risk management results in rewards, the option is between accepting the risk or outsourcing it. The decision between the two depends on the competency of the player. If competent accept it, if not outsource it to a competent player by paying a premium.
Crudely put, life is all about risk management. Our risk appetite depends on our sensitivity to risk and our competence. Shift in risk appetite is triggered by emotions on exposure to outrages.
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