When we consider risk, much of the discussion revolves around analytics, alternatives, probability, and bias. But, there are other important factors to consider, which are frequently excluded and, when dealt with properly, can create new opportunities. These include higher than normal results, lower than normal results, enablers, parameters for consideration, and excluding key unknowns.
Entrepreneurs generally advocate the untapped potential of their ideas without detailed analysis of parameters, requirements, and profitability. For example, Venture capital firms that take the risk of investing in several new companies only expect a few to perform with extraordinary results. Last year, they extended too far and many are in financial trouble today. However, the initial risk is appealing because, statistically, people do win the lottery, and companies like Zoom hit the jackpot and do well, especially when you consider the way they’ve evolved over the past few years.
The reverse is also occurring with unforeseen disruptions increasing risk. The slow pace of going back to work, success of tools like Zoom, supply shortages, and inflation are examples of factors not considered in much of our risk analysis. Political change, an increase in crime, and higher levels of stress are creating more uncertainty when assessing change and potential. These can all add to excessive losses beyond normal probabilities.
Another inhibitor of success are enablers. While experience and expertise can improve results, one of the worst strategies in our changing environment is tradition or the mindset that “we have always done it this way.” It simply ignores change, alternatives, and processes, and is frequently fueled by proponents who fear those same things. Sexual harassment, equal wages, and COVID vaccines are some examples where progress has been exceptionally slow due to people being unwilling to recognize the need for change and accept and implement new ideas.
Currently, everyone seems stressed and frustrated with issues like crime and inflation. However, enablers seem focused on short-term solutions rather than a true commitment to solving the problems. We must also recognize that many of these are worldwide issues. For example, both France and Israel are experiencing political disruption as well.
Additionally, inflation, oil prices, and supply shortages are all causing great disruption, which increases risk, but these unknowns will also create opportunities. Innovation in solutions like electric cars is a key area where there is ample opportunity.
Risk management is also affected by quantitative versus qualitative considerations. On one hand, quantitative measures are objective, comparable, and easier to document. However, we must ensure we are using the right measures and analyzing correctly. Qualitative data, on the other hand, can measure issues we don’t always consider and allows for intuition. But, these processes can be compromised easily or measure wrong factors. In particular, bias occurs much more frequently in qualitative analysis.
Risk analysis should also include the various impacts of diversity. The world is creating a significant amount of new wealth, yet income disparity is increasing, with 1% of U.S. households owning over 50% of the wealth. While there is more integration and assimilation, tensions have also risen in political, economic, and social structures.
When it comes to risk, we also need to consider ignorance and ways to manage it. Ignorance shows up in a number of ways, which require different approaches. Some ignorance is just the unknown—like the economy next year, the long-term pandemic impact, and potential new technologies (such as a longer lasting electric car battery). While we can’t assure certainty, we can research alternatives and their consequences.
Some ignorance comes from a lack of knowledge. Consequently, a focus on bias, parameters, and assumptions should be included in risk analysis. For example, we should understand our target audience and trends like the growing diversity and wealth in our country.
Ignorance can also be a function of pure denial. Assuming excess confidence or unilaterally accepting respected colleagues can affect risk assessments. We can avoid denial by embracing openness and searching for alternatives. Organizations need to welcome measurement and feedback. Observing, understanding, and sharing financials, operations reports, and sales reports are the first step. Simple research tools (which social media can provide) should be used regularly. A management style such as the “walk around” and simply asking, “How are you doing? Is there anything you need?” can be priceless. Look for alternatives and ‘what if’ discussions.
Viewing risk as an opportunity rather than an obstacle can help produce positive results. Change is occurring faster and faster and we must resist the urge to crave the comfort of consistency and reliability. We need to shift our mindset to one that expects risk. This might make you feel uneasy, but know that we are all in the same boat. Try to remember that staying flexible will make adapting easier. And implementing sound, proven strategies will not only set you up for success, but put you in a position to effectively and efficiently manage risk.
Dr. Bert Shlensky, president of Startup Connection, prides himself on his ability to define what is unique about each and every business. He works closely with individuals to develop a personalized approach that targets specific areas of concern and offers solutions based on his 40+ years of experience. His team of experts will address your particular needs while working to save you time and money.
Risk is a critical part of every decision. And, frankly, I think we all need more of it. We tend to think of risk as a taboo concept and it’s really not—once you understand it.
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In order to benefit from risk, you need to define what risk is to you. Some people view risk as the “potential for harm or hazard” (think bungee jumping). I view risk as an “uncertain circumstance in which one manages to maximize the gains.” But, how do you maximize the probability of success?
Here are some key parameters that affect risk-based decisions:
Consider conditions. For example, you have almost certain probability that, in general, October will be cooler than September. However, forecasting a certain day adds risk and uncertainty.
Reduce risk where you can to allow even more risk in other areas. For example, more analytics in sports is creating opportunities to assess strengths/weaknesses and create new winning strategies. It has enabled athletes to take more three-point shots, hit more home runs and longer golf drives, and score more touchdowns. Similarly, surfers used to ride 29-30 waves and now they are comfortable in 50 to 80-foot waves. Jet Ski rescues, inflatable vests, and leashes are among the tools that reduce uncertainty and increase potential.
Know the value and probability of the reward. Winning the lottery has an extremely high reward, but also has low probability. Purchasing investment bonds has lower return than buying stocks, but the risk and volatility of buying stocks is higher.
Value is also affected by the law of diminishing returns, which states that: as the input or value increases, the incremental changes become less important. It is easily summarized by the old saying, “Too many cooks spoil the broth.” Other examples include adding superfluous benefits to an offer, endless presentations, annoying excessive service, or just making the reward dramatically above what is needed or desired. Let’s say you love pie, but only have it once in a while as a treat. In this instance, the value is higher. But, if you eat it every day, it becomes less special and the value decreases. The same goes for a visit with your in-laws: Once a month is good, one a week might be less good, and every day might really be pushing it…
Understand the perceived importance of the reward. People generally regret losses more than they appreciate gains—and that is a key factor to consider when making any decision. When choosing a college to attend, decisions depend on area of course study, school size, location, tuition, the school’s reputation, etc. Are some of these factors more important than others? It varies depending on the individual.
The benefits from risk are a result of integrating the above examples to maximize results. Let’s look at the game of craps as an example: When you roll two dice, there is over a 40% probability you will roll a 6, 7, or 8 and about a 6% probability you will roll a 2 or a 12. So, if you’re placing a bet, knowing the odds (i.e. the probability of the reward) will reduce the risk. Betting is based on your willingness to risk in order to earn higher or lower rewards. The most forgotten aspect of craps (and all betting, for that matter) is that, over the long run, the house wins which is why casinos are so profitable.
Risk needs to managed rather than feared. Understanding the risk, the rewards, and the importance of each can help you improve outcomes. Don’t allow fear, uncertainty, or tradition to lower your potential and prevent you from trying something new. Only those who dare to risk going too far can find out how far one can go.
Key factors to consider to increase the benefits from risk:
Understand all the information. Knowing background, probabilities, and parameters can greatly enhance outcomes. For instance, investment decisions are greatly influenced by history and trends. However, because there is so much change due to the pandemic, the risk is now more volatile and opportunistic. Knowing the circumstances around your decisions is key.
Psychology. Assessing risk has a number of psychological constraints: a) People tend to take more risks to win back losses and less risks to follow up on winnings. b) Marketers love to push fear. When you are buying a car, appliance etc., they push its safety, reliability, and excellence. After you commit, they try selling a warranty. They induce fear by citing all the things that can go wrong. c) We overestimate our skills and luck. Tons of profits are made at casinos and in sports betting based on countless people believing that they can beat the odds.
Think about your decisions and the outcomes. We often perceive decisions as win-lose situations where one-party wins and another loses, but there are different types of decisions. Changing that mentality to “win-win” can have dramatic benefits and we tend to underestimate the opportunities we have to achieve this. For example, who would have believed decades ago that the mergers of Vietnam and Germany would be so successful? So, when making a choice, brainstorm ways to maximize benefits all around.
Rethink your strategy: Zero sum game versus non zero-sum game. Which are you employing? The best negotiations result in both parties winning. This takes collaboration, assessing varying (or even opposing) goals, and increasing the metaphorical “pie.” In particular, try to understand what is important and unimportant for each party involved. For example, many traditional retailers viewed online shopping as a liability in terms of disrupting their regular business. Now, they’re viewing it as a savior, recognizing it’s a safe and effective way to meet the needs of their consumers.
Risk mitigation. The best, simplest, inexpensive, and most effective way to mitigate risk is to gather more information. The more you know about making a decision, the less risk it will involve. Other tools include: insurance, diversification, and leverage. One of the challenges of mitigation is that people often use it to take even more risk and that defeats the purpose.
Listen to your gut. Sometimes you just have to ignore some of the information and go for it. We tend to overthink things or we let fear stop us from taking risks, but there is no gain without trying and no reward without risk. If your intuition is telling you something, it’s usually worth listening.
Risk needs to managed rather than feared. Understanding the risk, the rewards, and the importance of each can help you improve outcomes. Don’t allow fear, uncertainty, or tradition to lower your potential and prevent you from trying something new. Only those who dare to risk going too far can find out how far one can go.
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When you want to stand out, reach out to Bert for the tools that will build your “sticky” brand. My focus is on understanding and analyzing your dilemmas and challenges, so your company becomes profitable faster.
Call (914) 632-6977 or email me at bshlensky@startupconnection.net. Don’t leave without signing up for our useful free eBook!
Feeling stumped or overwhelmed? Contact Bert at (914) 632-6977 or Email to start the process. Thanks!
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Everyone is aware of and considers change, but the rate and impact keep accelerating faster than our ability to manage it. In addition, it is happening in all aspects of our lives. As a result, we need to focus more on identifying and understanding change and then...
Everyone talks about demographic statistics like age, race, and geography without giving much attention to the cultural implications that go along with these demographics. For example, 42% of the current population was born before 1980, making them 45 years or older....
We can get so obsessed with strategy, our great idea, and finance, etc. that we ignore parameters which can be critical to our success. One of the biggest mistakes I see startup owners make is failing to consider parameters as their North Star. “If you don’t know...
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Too many cooks spoil the broth. A child, looked after by
seven nannies, is a child with one eye… Phrase it however you want, but when many
manage one thing, some things are missed or turn out wrong. The camel analogy
specifically criticizes committees and group decision making, implying that
incompetence results when too many people are involved on a project. Therefore,
the camel’s humps reflect bad planning and inept design when the original concept
was a horse.
These proverbs speak to a number of current issues
regarding decision making, innovation, and performance. It’s worth asking: How
disciplined, organized, programmed, and/or fact-based should decisions be? Or are
we heading in the direction of unstructured, flexible, creative, and innovative
planning?
Unfortunately, we tend to rely on preset parameters or
stick to old habits rather than pursuing the most effective process. So, let’s
explore some topics that can help you decide what the best plan of action might
be for any given scenario:
Camel (Committee)
Versus (Horse) Individualism
The simple answer is it depends. If you have a thriving
company with ample market and internal capabilities, diversifying can be an
exciting option. In particular, vertical and horizontal integrations can assist
in achieving better use of your resources. Similarly, if you have operations or
marketing capabilities, cooperation can be highly productive in better
utilizing those resources.
In contrast, the less resources, knowledge, or experience
you have with cooperation, the less you should do it. Diversification does not
work effectively in business cultures that have no synergy. Similarly,
cooperation frequently fails when it is done to solve or cover up weaknesses. The
K-Mart and Sears merger is one of the best examples of failed diversification
which was executed with poor management and a prayer that two losers would make
a winner.
Innovation Versus Discipline
I believe innovation and discipline can coexist. You
simply need to focus on improving autonomy at all levels as you simultaneously
increase discipline. For example, Google, among other big corporations, are
developing artificial intelligence (AI) programs to write and develop artistic
works like music and art. They argue that this technology will greatly enhance
an artist’s ability to create. Others disagree, saying that it will just
replace artists. My own experience in the knitting industry showed me that
automation greatly enhances an artist’s potential and reduces mundane tasks. I
believe that similar improvements are evident in areas like digital photography
and animation.
George Bernard Shaw said, “The reasonable man adapts himself to the
world; the unreasonable one persists in trying to adapt the world to himself.
Therefore, all progress depends on the unreasonable man.” Similarly, Steve Jobs
quipped that if he asked customers what they wanted; it would be obsolete
before he got it on the shelves. So, it remains that innovation is a
necessity, but if it’s unmonitored, you may end up with that pesky camel…
Focus Versus
Diversification
Some businesses
try to randomly pursue diverse options by simply throwing s**t at the wall and
seeing what sticks. Others complete so much research and planning that, in the
process, aspects like goals, probabilities, and outcomes are overshadowed or
forgotten. Business owners need to identify priorities and focus. From there,
test and adopt or change as opportunities or issues arise. It’s important to
remember that many plans are based on wrong assumptions or are poorly executed
and, therefore, do not succeed or are unable to adjust to change.
For example, I
was working with a client who was trying to execute over 15 different
educational programs and was stressed out, over budget, and not managing
effectively. We simply cut out the least effective programs which saved money
and, as a result, were able to allot additional attention and resources to the
more effective ones. Focusing your strategy can be accomplished with a few
simple efforts:
Measure, Estimate, Prioritize, and Adapt.
Follow the 80-20 rule.
Make
mistakes and learn from them.
Be open to change and feedback.
Experience and
Expertise
In his book “Outliers,” Malcolm Gladwell became famous for stating
that, “10,000 hours of practice are required to become a world-class expert.” I
am not sure it is 10,000 hours, but my experience indicates that experience and expertise are probably the
most important factors in achieving success. That doesn’t mean you need expertise
in everything, but it does mean you need at least a hook in the field you are
pursuing. And if you know you are lacking expertise in a critical area, I
suggest hiring someone to help.
For example, right-brain creatives typically don’t like
financial analysis so it’s usually a good idea for them to hire an accountant.
In the last couple of weeks, I have had clients with seemingly great ideas and
passion who overestimated their gross margins by 10-20%. They simply didn’t do
the detailed financial work and didn’t understand that those numbers could make
a huge difference between profit and loss.
This argument is in no way intended to ignore the
importance of passion, commitment, innovation, testing, and even mistake making.
I’m just saying that both individuals and organizations need to realistically
assess the risk of failure and the reward of success. Expertise and experience
are critical for accurately evaluating opportunities and new innovations.
Risk Evaluation
Are all of the features of a decision understood?
Do you know the probability of reward, the amount of the reward, and the value
of the reward? For example, what are the goals of your efforts? My clients are
usually small businesses who need to make a profit and earn a living. Thus,
they frequently pursue less risk.
In contrast, venture capital firms are
frequently pursuing growth and worry whether the enterprise will be large
enough to generate large returns. Therefore, they expect a certain amount of
loss as well as some lost investments in order to generate large growth and
profits in other areas.
Analytics Versus
Intuition
The increased use of analytics over
intuition has been significant in improving the understanding and results of
decision-making. This shift was greatly influenced by the growth and confidence
in behavioral economics fostered by authors like Daniel Hahnemann, Richard
Thaler, and Michael Lewis. While there are no quick and simple resolutions,
there are a few simple rules to improve the decision process using both
analytics and intuition.
Analytics is simply the increased
use of research, models, probability, risk, numbers, and analysis to improve
decision-making. In some cases, it has proved to be a valuable tool to
understand and improve decisions or simply validate prior intuition—particularly
where there is plenty of stability and historical data. For example, I have helped
several of my clients improve their businesses by focus on the 20 percent of customers
or products, which we know, statistically, accounts for 80 percent of their sales.
Here are some simple
guidelines to help manage decision making dilemmas:
Understand goals,
tasks, and complexity. For example, the more uncertainty and unclear
information, the more you need to rely on intuition.
Integrate the proper
role of expertise. If you have complex tasks that require diverse resources,
incorporate collaboration. If you have standout experts with extensive
experience rely on their abilities. For example, I am always fascinated how
surgeons and lawyers delegate tasks to paralegals and surgical nurses.
Test, measure, and
adapt. Gather information, confirm ideas, adapt and improve winning ideas.
Incorporate risk to
evaluate the potential and results of success.
Don’t be afraid to
follow your passion, commitment, and instincts.
Take a break. We are
frequently too consumed and stressed with our tasks. We don’t take time to
incorporate efforts like training, casual lunches, social events, new ideas,
reading, and informal meetings into our routines.
The goal is really to find a balance between group decision making and individual efforts so you don’t wind up with a camel when you wanted a horse. Recognize when analytics, facts, and research can improve your decisions. And don’t be afraid to follow your intuition when traditional answers don’t seem correct. Taking probabilities, risk, and values into consideration, you should be able to find some harmony between the two ends of the spectrum.
When you want to stand out, reach out to Bert for the tools that will build your “sticky” brand. My focus is on understanding and analyzing your dilemmas and challenges, so your company becomes profitable faster.
Call (914) 632-6977 or email me at bshlensky@startupconnection.net. Don’t leave without signing up for our useful free eBook!
Feeling stumped or overwhelmed? Contact Bert at (914) 632-6977 or Email to start the process. Thanks!
