A college student once walked into my office, brimming with excitement. “I want to invest in Bitcoin!” he declared. When I asked why, he said, “My roommates are making so much money. They bought it last year and it has already doubled!” This type of enthusiasm is common, but troubling. One of the key distinctions between a novice and a seasoned investor is how they understand and respond to risk. This student was acting like a novice, in that the pursuit and thrill of easy money was overshadowing their ability to seriously consider risk.
But what does it really mean to consider risk?
Measuring Risk
Traditionally, investors use statistical tools to calculate risk, like standard deviation, volatility, beta, and downside deviation, to name a few.
For instance, a stock with a historical return of 10% and a 20% standard deviation would be expected to return anywhere between -30% and +50% about 95% of the time. The higher the deviation, the more unpredictable the investment.
Mature investors consider the standard deviation alongside the return potential of an investment and then aim to maximize their risk-adjusted returns. A simple way to do this would be to seek to build a portfolio that has the highest amount of return potential given the lowest amount of estimated risk. A common way to measure risk-adjusted returns is by using the Sharpe ratio. This ratio is expected return over expected risk and tells you how much return you’re earning for every unit of risk you’re taking.
But is calculating risk-adjusted returns, and properly considering the risk of an investment before you buy something, the only important factor for a mature investor regarding risk?
No.
Feeling Risk
I’ve always believed there’s more to risk than spreadsheets and ratios. Risk isn’t just something we calculate, it’s something we experience. It has the power to shape who we become.
When I was 15, I bought my first stock and watched it rise. The rise in every stock I bought coincided with a rise in a very delicious feeling of euphoria. Scientists call this feeling dopamine. While dopamine is fun to experience, unfortunately, it is wildly addictive. The more shots of dopamine I was experiencing over time, the more my brain was being formed and transformed from a cautious teen into someone who actively sought out risk. My brain was being rewired.
Neuroscientists have documented this. One study titled “Dopamine Agonist Increases Risk Taking but Blunts Reward-Related Brain Activity” showed how dopamine alters the brain’s reward system, pushing individuals toward greater risk-seeking behavior.
In extreme cases, this pattern mirrors gambling addiction, which is widely regarded as one of the hardest addictions to overcome. Once risk becomes tied to identity, it’s no longer about strategy; it’s about chasing a feeling that changes our brain.
This isn’t just a theory. It’s a pattern we see in culture today.
The Rise of the Risk-Seeker
Easy gains over the last decade have created a new breed of investor: one that starts with meme stocks, moves to crypto, and ends up speculating on NFTs, sports, or more and more exotic types of new entertainment. These are markets where risk isn’t just high, it’s often unknowable.
And when risk becomes unknowable, you’re not investing, you’re gambling.
My wife experienced the opposite end of the spectrum. She bought a townhouse in 2007, just before the crash. The financial loss left her extremely risk-averse, even after the markets recovered. Her brain, like mine, was shaped by her experience, but in a different direction. She experienced so much pain that her brain actively sought to eliminate risk and she became overly-risk avoidant, which is another type of problematic financial behavior.
Properly Considering Risk
To truly evaluate risk, we must do two things:
- Calculate it – Use appropriate tools to measure the potential ups and downs.
- Reflect on it – Ask how this risk might form you. Will it encourage long-term thinking, or tempt you toward short-term gains?
If an investment’s risk can’t be calculated (hello, crypto and NFTs), it’s probably a poor fit, especially for business owners who value sustainability, not speculation.
Whenever my students ask about investing in Bitcoin, I ask them, “Will it change you?” Most assume wealth won’t alter who they are. But research on lottery winners shows the opposite: fast money often leads to long-term dissatisfaction and compulsive behavior.
Protecting Yourself from Risk’s Dark Side
Here are two simple tips to avoid being reshaped by risk:
- Be skeptical of anything you don’t understand. If you can’t explain why something goes up or down, you may be in gambling territory.
- Check your investments less frequently. Review once a month, or even just twice a year. Boredom is underrated—it supports both emotional and financial stability.
Long-term investors who bought and held diversified portfolios have quietly built wealth. Meanwhile, countless others who chased hot tips and quick wins are broke, both financially and emotionally.
The Bible puts it plainly:
“Those who want to get rich fall into temptation and a trap… and into many foolish and harmful desires that plunge people into ruin and destruction.” – 1 Timothy 6:9
“Watch out! Be on your guard against all kinds of greed; life does not consist in an abundance of possessions.” – Luke 12:15
In the end, I recommend the boring path, like my Nana, who bought a simple portfolio of high-quality stocks and forgot about it until retirement. That quiet, patient approach gave her what she needed, when she needed it, without putting her brain, or her life, at risk.
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