Is risk taking scary? If you’re only thinking about the possible negative outcomes, yes. But, it can be exciting if you take more risks if you focus on the potential positives results.
Many risk takers enjoy gambling because the the idea of winning something is more exciting than losing… For others, the idea of losing money is more unpleasant than the potential of gaining—and that makes the experience unenjoyable for them.
Nonetheless, in business, it’s important (and frequently imperative) to take risks in order to expand, grow, and adapt. So, how do we take more risks responsibly?
Evaluate The Risk
What and how much is really at stake? If a lottery ticket costs $20 and the two potential outcomes are to lose $20 or win $2 million, is that risk worth it? For some, yes. But, not every risk is right for everyone.
What exactly is on the line and how much can you afford to lose? Weigh the pros and cons. For example, buying lottery tickets, gambling, and staying at a cheap hotel are all things that have a low probability of “winning.” However, they are affordable and the rewards are often high.
In contrast, using all of your funds on risky investments, not buying insurance, or driving somewhere without directions are all risks that have the potential for significant loss and marginal benefits. This leads us to the next point…
Understand The Odds
Do you really, truly, and completely understand all the aspects of the risk? The probability of reward, the amount of the reward, and the value of the reward? Do you know what you’re going up against and what it would take to recover the potential loss?
Assess The Worth
If we consider skydiving a risk… the cost is fairly low and the probability of surviving is very high. However, the fact that (despite good odds) there is even the slightest chance of death makes it too much of a risk for many people. Truly understanding all the aspects of any risk is key to deciding whether it’s worth it to you.
Know Your Goal and Set Limits
For me, playing cards is problematic because, if the stakes are low, I play more daringly and end up losing quickly. If the stakes are high, I worry too much about losing and don’t bet.
If my goal is to have fun, I’ve learned that the best strategy is to set a monetary limit so I can enjoy myself without worrying about excessive loss. Different approaches will work for different goals. For example, in craps there are some back bets that are at even odds. If my goal is to stay at the table as long as possible to watch the action, I won’t take those bets because I’ll lose my money faster and reach my limit sooner. For someone who is solely concerned with winning quickly, they might take those bets.
Consider Normal Distribution
Normal distributions have many convenient properties, such as the concentrated curve in the center, which decreases equally on either side. The highest probabilities are around the mean (center or average) and the lowest at the edges of any distribution.
Some examples of its application are:
- The probability of heads or tails in a coin toss is 50% over the long run, but can be very skewed one way or the other when considering just a few flips.
- The probability of rolling a 7 with two dice is about 16%. That is the same as rolling a total of 2, 3, 11, or 12.
The biggest issue here is that we sometimes assume a normal distribution when the data doesn’t match. Changes in technology and/or deviant data points frequently challenge our assumptions and estimates.
I argue that normal distributions frequently underestimate outliers (i.e. exceptional people like Steve Jobs, the impact of political events, technology, or just unusual results). It’s counterproductive to always assume normal distribution is at play when there are other important factors to consider, such as innovation, unexpected data, and emotion. That 1% at the end of the distribution chart with an extremely high value is what frequently accounts for exceptional behavior— it’s where we find the individuals who ignore the odds and take a big risk.
Tips to minimize loss:
- Have a backup plan.
- Research everything: cost, odds, competition, value, risk, and alternative strategies.
- Know your strengths and play to them.
- Test and analyze results so you can adjust accordingly.
- Adapt and be flexible. Most efforts won’t succeed on the first try, but practice integrating the positive components from each trial with some different approaches.
- Incorporate rather than ignore change, history, trends, and special events. For example, the impact of E-commerce, analytics, and cell phones are just starting to be understood and the potential may be much greater than estimated.
If risk still seems daunting to you, try to look at it this way: When playing a game like Black Jack (or while running a business), there’s a strategy and you constantly have to assess the cards you’ve been dealt in order to get the most out of the money you’ve invested. Owning a business in and of itself is a risk. It’s just a matter of deciding how much and what kinds of additional risks you want to take to propel your business to the next level.
Sure, you can argue that riding the middle lane is safe and risk-free, but it’s naïve to think anything is “secure.” Life is more like Roulette: just when you think you see a pattern, chaos breaks loose. You could never intentionally take more risks and still suffer loss in the form of an unexpected economic slump, a natural disaster, or theft. At least with a planned risk, there are controlled aspects that take the unknown odds into consideration: a combination that weighs risk/reward and encourages growth.
Are you a risk taker? Does risk excite or scare you? How has risk helped or hindered your business? Share your stories in the comments!
Dr. Bert Shlensky, president of www.startupconnection.net, offers experience, skills, and a team devoted to developing and executing winning strategies for businesses of all kinds. This combination has been the key to client success. His book, “Passion and Reality for Small Business Success,” is available at www.startupconnection.net.