In the standard economics textbooks, rational agents take risks only when the probability of a successful outcome exceeds a painful one. Of course, avoiding all risk—driving cars, playing sports, flying in planes, or living in cities, just to name a few everyday risky activities—would make for a dreary life. Uncertainty is one of the very few certain things in this world.

In fact, research shows that very smart people, including professional planners and decision makers, systematically underestimate risks all the time. As I noted earlier, the problem of optimism bias is so common among managers and entrepreneurs that the Nobel Prize winner Daniel Kahneman and his late partner Amos Tversky came up with a name for it: planning fallacy. “In its grip,” Kahneman writes, “they make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities.”¹

The psychologists are right in one sense. Entrepreneurs are not looking at risk accurately because their high levels of optimism let them underprice risk and move forward. It seems probable to me that this is genetically coded. Without optimism bias, ancient humans would not have risked their lives to hunt the woolly mammoths or bears that fed the tribe. High levels of somewhat unjustified optimism seem to be most prevalent in 20-to-30-year-old men.², ³ Perhaps this is why they are more likely than others to choose—and claim to enjoy—jobs that are full of stress and risk, like flying fighter jets, trading commodities, and working on oil rigs.

But where the psychologists go wrong is getting too hung up on the role of rational weighting and probabilities, which presume that risks can be accurately appraised. My own experience, which matches the experiences of a number of entrepreneurs, has convinced me that risk can be in the eye of the beholder.

For example, let’s say I’ve spent 25 years in the real estate business and you’ve spent 25 years in an entirely different industry, and we’re both looking at the same building. Both of us agree that it has problems. Perhaps it’s a bit dilapidated or on the wrong side of the tracks. But my 25 years have shown me paths for creating value that you can’t see. For me, the risk might seem dramatically lower than it does to you—and the potential upside leverage that much greater. I’m not saying that experienced entrepreneurs are omniscient and should always trust their guts, and that the analysts who quantify risk are always blind. That would be stupid. But I think that it’s equally stupid to believe that there is only one way to weigh risk.

What mitigates the uncertainty in any deal or investment can be your expertise or unique perspective. That badly located building could be a very good deal if the price is cheap enough, and I can see a new use for it that might not occur to you.

As my mentor David Fromer taught me, “There is no such thing as good or bad real estate, just good and bad deals.” That perspective doesn’t apply only to real estate.

I was reminded of the profundity of David’s insight while reading Howard Marks’s 2011 book on investing, The Most Important Thing: Uncommon Sense for the Thoughtful Investor, which has already become a classic. “High risk,” Marks explains, “comes primarily with high prices,” no matter how diversified your investments are or how accurately you have measured volatility in the markets.⁴

But how do you know when you’re paying too much? As you saw in the previous lesson, if the opportunity you are considering is in real estate, it helps to have the experienced eye of a successful real estate entrepreneur. As naturally optimistic and comfortable with risk-taking as they are, the best entrepreneurs I know are risk averse in one clear way: They are not likely to pursue opportunities that are outside their expertise. And if they do, they are highly focused on learning enough of the fundamental dynamics of an opportunity to know what real value looks like.

Take David Russell. He advises, “If you’re successful at something—real estate or software or whatever your expertise is—there’s no particular reason to take on risk regarding things that you’re not familiar with.”⁵ But David, a self-described riskaholic, has made himself successful at a dizzying variety of things. And he’s done it by soaking up knowledge wherever he can find it.

David founded a communications software company that developed a proprietary delivery network for up-to-the-minute bond market information for banks and brokerage houses, which he sold in 1995 to Thomson Financial (now Thomson/Reuters). “When I sold my business, I didn’t know anything about investing,” he confesses. But David is a brilliant guy, a dedicated pianist, and an avid student of poetry who, with the advice of fellow entrepreneurs, turned himself into a pro. Now he is in the energy business, investing in technologies to recover oil and gas cheaply.

In August 2015, when the price of oil had plummeted from $107 the year before to $39 a barrel, David reported that he had millions of dollars invested in his own oil company—and was planning to invest significantly more at year’s end. He was betting that prices would still be low, leaving those who borrowed to buy oil at $60 plus “in pain” as the banks recalled their loans. “This will be the best time in perhaps a generation to buy oil assets, so that’s what I’m doing. As I said, I’m a riskaholic.”

David’s confidence is based on considerable knowledge about the business he’s in. And not only that, he believes he has an edge based on price. The technology that his oil company has developed can get a barrel of oil out of the ground and to the refinery for less than $10, which means that it’s possible to make a profit whether oil is selling for $30, $45, or $100-plus. I sure hope he is right, for his sake. Managing risk and eliminating it are very different things, and no matter how smart David is, the oil trade has a lot of risk.

Bottom line: Fear risk and respect your capacity for worry, but when you know your business and pricing is on your side, what looks like risk to everyone else can be a beautiful thing. That is the essence of an edge.