As we start wrapping up another year, it’s a good time to examine areas we are looking to improve. One proven way to get better results is to take more risks and then take even more risks.
Overall, we avoid reasonable opportunities to utilize risk to our advantage—most likely because we have an unhealthy relationship to the word. Maybe we need to start thinking of “risk” as the “potential to win.”
Recently, I saw a perfect example of how this detrimental aversion to risk actually does more harm than good. Two underdog football teams lost because they refused to take risks and be unconventional. I believe the coaches were simply afraid to be second-guessed and made decisions that were almost guaranteed to lose. Similarly, sports teams consistently take fewer three-point shots, steal fewer bases, and attempt fewer two-point conversions than the odds would dictate.
This phenomenon has also been well documented in organizations. Some of the most notable examples are Kodak refusing to recognize digital, Xerox basically abandoning Windows technology, and retailers failing to recognize the impact of the Internet. Currently, the financial markets seem hesitant to recognize the slowdown in tech stocks. Why do companies act this way in spite of the many cases in which change is both organizationally and financially justified?
If you’d like to avoid this tendency of evading probable wins, here are some strategies to increase risk with limited downsides:
Manage probability better. This can provide greater opportunities, including both value and probability of success. For example, when lotteries increase, the odds of winning remain constant, but the value of winning increases dramatically.
Keep your perspective in check. As uncertainty and change accelerate, probabilities can also change. For example, many analytical efforts are reduced by the volatility of 2019, 2020, 2021 and 2022, which need to be considered together. Getting excited or depressed about one year is erroneous. In general, the four years together provide a more positive and reasonable perspective than just one year. See also: Embrace Uncertainty with Positivity.
Don’t be afraid of losing. Many studies have shown that we are about twice as likely to avoid losses than pursue gains. For example, we will trade stocks with gains twice as fast as selling stocks with losses despite tax advantages for selling losses.
Understand and maximize goals and needs. The simplest technique is to understand the needs and goals of your partners in a relationship. For example, are you willing to endure short-term losses to develop long-term gains? Similarly, are you willing to invest in efforts like quality, customer service, and people to improve the chances of success? See Make Goal Setting and Measurement Work for You.
Reduce bias as much as possible.The greatest detractor from effective decision-making (which can be intentional, random, hidden, or even unknown) is bias. Probably the greatest source of bias is our own set beliefs, experience, and reliance on a “we have always done it that way” mentality. Thus, we simply ignore information or facts that are different than our own. Another factor is incomplete or wrong information. However, when we eliminate bias, we increase our probability for success.
Be more open. Organizations need to be open to measurement and feedback. Observing, understanding, and sharing financials, operations reports, and sales reports are the first step. Take advantage of simple research studies, which social media can provide. These are worthwhile tools to use regularly. A management style such as the “walk around” and asking simply, “How are you doing? Is there anything you need?” can be priceless.
Remember that mistakes are often the best way to learn and grow. One of my favorite phrases is, “If you aren’t making mistakes, you aren’t trying hard enough.”
Environmental and external influences can greatly affect risk as well. Inflation, oil prices, and supply shortages are causing great disruption today, but they will also create opportunities. Electric cars, the chip shortage, and logistics are areas where unknown opportunities will emerge.
Risk considerations are also affected by quantitative versus qualitative considerations. On one hand, quantitative data are measurable, 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.
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. Other forms of ignorance are the refusal to accept new information or unwillingness to remain open-minded.
Viewing risk as an as an opportunity rather than a danger can 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 and embraces risk. If we can learn to implement sound, proven strategies, we’ll simultaneously set ourselves up for success while being 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.
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.
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.
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