Self-reinforcing cycles of risk taking.
Risk appetite is not a stomach that gets filled up. It is a muscle that gets stronger with use. Taking risks begets more risk in a self-reinforcing cycle.
Reinforcing Cycles in Markets
In a bull market, a trader going long sees his profit and net worth increase. Two things happen:
- The trader is more confident in his ability. He takes more risk.
- His account size has grown, so he has more money to take risks with.
The result creates more wild boom and bust cycles than if a person’s risk appetite is constant. As the market continues up for the bull, risk increases, but the trader hardly notices.
When Solana is mooning from $3 to $67, traders continue to add risk. The reduction of risk happens the same way on the way down.
Price of Solana from August 2021 to July 2022
Actionability
To get outlier results in life, you need to take risks. Intuitively, playing it safe will get you the middle of the bell curve.
To strengthen your risk taking muscle, take risks. Unnecessary ones.
In 1996, Joe Liemandt was the youngest member on the Forbes 400. He encouraged risk taking by offering to front $2,000 to any of their college recruits in Trilogy University. That money had to be used to bet on one number on a roulette wheel.
From Joe:
It’s enough to hurt if they lose, Liemandt reasoned, but not so much that it would wreck anyone. That was the level of risk taking he wanted them to adopt as Trilogy employees.
Who is more likely to play $2,000 roulette: a professional motocross racer, or a doctor?
Who’s life would you rather have?