Risk More, Win More

Risk More, Win More

by | Dec 27, 2022 | Driving Profit - Main

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.

Postive Risk Taking Don't think: Risk=Danger Think: Risk=Reward

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.
"Be brave. Take risks. Nothing can substitute experience." -- Paulo Coelho
  • 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.”
"I have not failed. I've just found 10,000 ways that won't work." -- Thomas Edison

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.

Take the risk or lose the chance.

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.

For more information, see Can Risk Create New Opportunities?

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.

You can reach Dr. Shlensky at: 914-632-6977

Or email: bshlensky@startupconnection.net

Take More Risks!!! …And STOP WORRYING About It.

by | Oct 15, 2019 | Finance Articles

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.