I’ve been reading authors like Seth Godin about how the lizard brain creates so much fear in us, and the wisdom of going ahead with things (like new product innovations) that scare the lizard brain to death.

I’ve also been reading about what causes people to lose a lot of money in business and in markets. Avoiding large losses appears to be more important than having the right analysis or trading strategy. There’s a psychology to avoiding large losses, and it has to do with healthy fear.

I think the lizard brain is right about something here. There is a skewness to risk that we are intuitively aware of.

Risk is skewed like this: There’s such a thing as a permanent loss, but there’s no such thing as a permanent gain.

If a gambler loses all his money, he doesn’t get to play anymore. He doesn’t get the benefit of the next random upwsing, because he is out of the game. This applies even more strongly to sheer physical survival (and this is what our lizard brains are obsessed with). If you are dead, you don’t get the benefit of the next opportunity to pass on your genes. If your business is bankrupt and shut down, you don’t get the benefit of the next big sale that might come along. There’s no upside opportunity when you are out of the game.

But the reverse is not true. No matter how big the gambling win, how not-dead (healthy?) a person is, no matter how large a sale a business just landed, those gains are still subject to downside risk.

As much as I can, I want to avoid risks in life and business that have a measurable chance of taking me out of the game. I won’t make all-in bets on new products or expensive marketing if I have a good, lower-risk alternative. I won’t borrow so much that I might get shut down by the bank if business dips.

Yes, we must learn to use our rational brains to tell the difference between dangers that could seriously hurt us, and dangers that can’t. (Public speaking for example terrifies the lizard brain but falls under the latter category.) But as we evaluate risk in business I think it is wise to account for the skewness that comes from the risk of being taken out of the game. I think the lizard brain is right about that part.

One qualifier: Although non-death losses like bankruptcy can take me out of the game, they aren’t truly permanent of course. The gambler can work and save up some more gambling money. The entrepreneur can raise new funding and try again. So the lizard brain is more afraid of these events than it needs to be. Nonetheless the skewness I’m talking about is real, and I think being taken out of the game, even non-permanently, is a loss worth taking extra precautions to avoid.