Self-Confidence, Self-Esteem, and Risk Tolerance
I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with musings that are designed to support your journey of personal and professional continuous improvement, and to improve financial literacy around the world. Today is April 12, 2025.
Welcome back to our continuing conversation about your personal relationship with risk. Last week, we defined what risk is, introduced the concept of risk aversion, and provided links to two free assessments that can be used to get a sense of how risk tolerant/averse you are in your current state.
You might be asking, “why is an understanding of risk tolerance so important to building financial literacy?” Well, as the old saying goes, there is no reward without risk. Indeed, one of the most important balancing acts you will play throughout your life is the balancing act between risk and reward.
This critical balancing act isn’t exclusive to financial transactions—it applies to all aspects of our lives. You take a risk when you ask someone on a date with the expectation of a “yes” and a new relationship as the reward. You take a risk when you apply for a new job with the expectation of a “yes” and a new job as the reward. You take a risk when you raise your hand to work on that cool new project, with the expectation that it will lead to the reward of a promotion or some other type of recognition from your supervisor. I could go on and on.
The Role of Self-Esteem and Self-Confidence in Risk Tolerance
These rudimentary examples of risk-reward tradeoffs should make clear that there is a positive correlation between risk tolerance and self-confidence and self-esteem. Here, it’s important to distinguish between these two concepts because although they appear on the surface to be similar, and there is some overlap, they also have distinct characteristics.
Self-esteem is how we value, love, and respect ourselves. Self-esteem changes over time based on our life experiences. For example, if an individual is trapped in a community where bullying and intimidation are the norm, self-esteem will be challenged and will decline over time. In contrast, if that same individual is now exposed to a community where loving, supportive behaviors are common, self-esteem is likely to slowly increase over time as trust in this new, supportive environment builds.
Self-confidence is grounded in your belief in your capabilities. Note that your belief in your abilities depends heavily on the circumstance. Using a personal example, if am asked to give an impromptu talk on present value return calculations, I would be confident I can do a good job on this task based on my extensive training and work experience in finance and education. If ten minutes later I was asked to pilot an airplane, my self-confidence would sink to near zero as I have no experience performing that task.
The key difference between the two concepts is that self-esteem changes more slowly through time based on community/interpersonal interactions, and self-confidence can be high or low depending on a specific set of circumstances. Said differently, self-confidence is typically event-specific whereas self-esteem is the general regard with which we hold ourselves.
The bottom line is that if I feel better about myself—meaning I have positive self-esteem—and am more confident in my abilities—meaning I am self-confident, then my decision-making will improve and I’ll be willing to take more informed, calculated risks to experience higher rewards in life and enjoy higher financial returns.
I can’t stress enough that I’m talking only about taking informed, calculated risks. Purposeful risk seeking for the sake of enjoying the risk itself is an entirely different subject—we’re not talking about skydiving or bungee jumping…
How to Improve Self-Esteem and Self-Confidence
So my willingness and ability to take more informed, calculated risks is positively correlated with my self-esteem and self-confidence. Now what? How do we build self-confidence and self-esteem? The irony is that to build these characteristics in ourselves, we must take some risk—we must make ourselves purposefully uncomfortable.
Here are three recommendations:
Commit to a journey of continuous improvement and lifelong learning. Competence is power and competence builds self-confidence. Remember, competence is knowledge + skills + abilities + attitudes, so the old saying “knowledge is power” only addresses part of the competency equation. Stretch yourself and make yourself purposefully uncomfortable by learning something new about money, investing, and finance. As competence grows, decision-making will improve. As decision-making improves, confidence in taking bigger risks will increase, leading to higher expected rewards and returns.
Surround yourself with positive influences that will challenge you to improve in an environment of psychological safety. Note that these are not the people in your life who just tell you what you want to hear, and are certainly not your “bad idea bears” who are loads of fun but are a constant source of poor decisions. They are also not the people who question your abilities and purposefully or inadvertently press down on you with their negativity. One of my favorite new songs is Kacey Musgraves’ Deeper Well. The lyrics to this song punctuate the benefits of making changes to your surroundings to unlock new perspectives and enable growth. You’ve got dark energy, something I can’t unsee, and I’ve got to take care of myself… To build self-esteem and self-confidence, balance selfishness and selflessness. It’s okay to be selfish and say goodbye to folks who aren’t positive challengers.
Start small. Whatever you do, as you begin to take risks to build self-confidence and ultimately self-esteem, start small. If you’re not accustomed to taking risks and suddenly begin swinging for the fences, the sting from a set-back or failure will be particularly acute, learning from failure will be more difficult, and screwing up the courage to take another risk may be a bridge too far. “Well, I tried and failed—better not take any more risks—better safe than sorry,” is a one way ticket back to being timid and stuck.
So, that’s our lesson for today. Growth requires some degree of risk tolerance. The more self-confident, and the higher our self-esteem, the more calculated and informed risks we’re willing to take. To build self-confidence and self-esteem, we must take risks and be willing to learn from failures and missteps. This virtuous cycle works best when we surround ourselves with positive challengers—people who will simultaneously support and challenge you in an environment of psychological safety.
Until next time…
Grace. Dignity. Compassion.
