In the 15th century, when the Kingdom of Castile hoped to curb the Portuguese supremacy in the spice trade with India by taking a shorter route across the West, Columbus set sail with three ships from Andalusia in the direction of the Canary Islands. For the Crown of Castile, this was a high-risk investment – truly a “voyage into the unknown”.
But the chances of profit were worth three fully-equipped ships and their crews to the Crown. It was a cost-benefit trade-off that was not uncommon at the time. And ultimately an investment that would not only change the course of history but also pay off for the Kingdom in the truest sense of the word.
Sometimes the term risk is also extended to include profit opportunities. In the Chinese character for risk/crisis 危机, for example, the first character means “danger”, the second “opportunity”.
Sometimes the term risk is also extended to include profit opportunities. In the Chinese character for risk/crisis 危机, for example, the first character means “danger”, the second “opportunity”. The expanded concept of risk is defined as “no risk without opportunity, but also no opportunity without risk.” In general, risk is the danger of loss that may result from the unforeseen occurrence of future events. In economic terms, loss risks are unexpected increased expenses or increased costs, reduced earnings, or reduced revenues. Loss risks or economic disadvantages always relate to the occurrence of future events that are uncertain both as to whether they will occur at all and as to the intensity with which they will occur.
We are all exposed to a large number of risks which we cannot completely avoid, even with the greatest efforts on our part and on the part of others. This is because every action is inseparably accompanied by the emergence of risks. Every person is therefore a potential risk taker who has the option of recognizing and bearing risks that arise as a result of risk perception or, in the context of risk management, of avoiding risk, minimizing risk, diversifying risk, transferring risk or taking precautions against risk. Whether and to what extent we do this depends on our respective attitude to risk.
Interestingly, the discovery of America was based on several misconceptions at once: Apart from the science of cartography, which was not yet very advanced at the time, the basis for the attempt to explore a short trade route to India was Christoph Columbus underestimation of the earth’s circumference, which made it seem possible to reach the Asian continent with the possibilities of seafaring at the time.
Arriving in the Canary Islands, he therefore had his ships overhauled and provisions taken. On September 6, 1492, they left the islands westward, on the supposed way to India. With ideal wind conditions, they made faster progress than predicted. After about ten days, they spotted seaweed and some flocks of birds, and it was thought that land could not be far away.
After a few days, however, it became clear that the sailors were wrong. Moreover, the wind was now shifting, so that among the companions the desire to return was growing. Unrest broke out. Although decision psychology teaches us something different: the so-called “sunk cost effect” is the fact that people tend to stick to the alternative action in which more has already been invested. Be it money or time. And this even when there are clear indications that the alternative will not work. The same is true, by the way, in other areas such as professional life or relationships. But, when it’s a matter of life and death, it seems only understandable not to invest further in a goal, like finding a shorter trade route to India. A mutiny could hardly be averted.
On October 7, Columbus made an unforeseen course change to the southwest. This turned out to be a fortunate decision. A creative solution away from the well-worn pattern – nowadays also called “Thinking outside the box”. High risk. But very lucrative.
A critical day, when the crew’s mutiny could hardly be prevented, was October 10. It had been over a month since the departure from the Canary Islands, and none of those present had ever been on a long sea voyage without seeing land. Moreover, it must be remembered that a sea voyage in the 15th century carried far greater risks than it does today. The influence of external factors such as natural forces, malnutrition and diseases, as well as social-psychological dynamics on board were hardly calculable at that time.
Columbus tried to convince the sailors of the advantages that awaited them on land, summoning the most influential sailors and reaching a final deadline of three days. One last willingness from both sides to take a risk.
And another one that paid off: heavy seas came in on October 11, which washed branches of flowers and a worked staff past the ships. Furthermore, the crews saw reeds, and the desire to turn back gave way to expectant excitement and joy for the land. Columbus ordered his men to take the night watches seriously and promised a special bounty to whoever would see land first. At two o’clock on the morning of October 12, 1492, one of the sailors sighted land off the bow of the ship – the Bahamas.
Now none of us is faced with the decision of whether to risk our lives crossing the Atlantic to find a new trade route for a royal house and go down in the history books as a glorious explorer. Our everyday decisions are more likely to answer questions like “Should I take the risk of riding a motorcycle?” or “Do I commit to a home or not?” We generally approach such matters intuitively and make decisions “out of the gut.” However, there is one essential prerequisite for being confronted with such decisions at all: The financial situation must first allow us this freedom.
Nowadays, many tools can help us assess the consequences external influences – such as inflation or interest rate policy – may have on our wealth. And we can act accordingly. The saying that something is “a safe bank” only applies to a limited extent today. The days when financial institutions protected their customers’ money like rocks in the surf are over. Although the money in the vault of a secure institution with risk reserves is well protected against robbery, it is not protected against devaluation due to economic influences.
Depending on which risk profile each of us corresponds to, intelligent investing can lay a solid foundation for fulfilling one’s wishes in the future. No matter whether risky individual investments or less risky, long-term ETF strategies: If you just follow a few rules, you can avoid the really big mistakes. But if you think you can’t take any risks these days, you’re actually taking a big risk.
On to new shores.