Category Archives: Courage

Taking Intelligent Risks

There’s a lot of literature out there encouraging you to take risks. Seth Godin says the greatest risk is to take no risks. Timothy Ferris says you need to be willing to do things that are uncomfortable. Julien Smith says you’re nowhere near the edge.

Their arguments make sense. And yet, we all sense, deep down, that quitting your job and walking away to become a professional magician is the wrong answer. (Maybe not all — if you sense that that’s the right answer for you, then please do so now. If I can help, let me know.) And since it’s easy to match that impulse with the advice you’re getting from society, from your friends, from your parents — it’s easy to assume that they’re all right, and the voices telling you to follow your dreams are wrong.

The fallacy is in the belief that this is a binary choice: either you stay in your job forever, or you quit it right now to pursue your passion. That’s it. Those are the only choices you have.

But what if there are more options? What if there are any ways to take a risk than all-out?

Everyone tells you to take risks — but you can still take intelligent risks rather than stupid ones. What makes an intelligent risk?

Upside vs Downside

When evaluating a course of action, identify the potential upside and the potential downside.

What if this project went wrong? What’s the worst that could happen? What’s the worst that’s likely to happen? What could you lose, in terms of money, other resources, of opportunities? In terms of respect, of self-respect, of confidence, of momentum? What would be the end result of this project if it didn’t work out? Write it down.

What if this project went right? What’s the best that could happen? What’s the best that’s likely to happen? What could you gain, in terms of money, other resources, of opportunities? In terms of respect, of self-respect, of confidence? In terms of momentum, experience, skills, or knowledge?

The best risks are the ones that have little potential downside, and massive potential upside. Things like starting a website: it takes $15 to register a domain; software and HTML lessons are free. In the worst case scenario, you lose the entire $15 you put into it, but you still improve your writing, your knowledge of website layout, HTML, and SEO. It’s entirely possible, however, you are able to make a website that gets some traffic. You’re able to turn that traffic into some money, and make $15 over the lifetime of the project. Then you come out even on money, and you still gain improvements in writing, website layout, HTML, and SEO. And in the best case scenario, from there you’re able to build enough traffic, and monetize it well enough to quit your job, travel the world, and work from the Bahamas or the Swiss alps or wherever else you want.

Or experimenting with teaching workshops. If no one signs up, then you’ve lost whatever money you put into flyers or signs. If one person signs up, then you’ve probably made your money back, and are feeling embarrassed that only one person was interested — but you can probably find a way to spin it as a “free upgrade to private tutoring!” and still get a lot of experience in what your target market is looking for, and what they need, so that you can improve your advertising for the next round. And in the best case scenario, your workshop fills up and makes you a couple hundred dollars, and you get a lot of experience and can improve it until you’re making a thousand dollars every time you run a two-day workshop.

In those cases, the potential downside is very small, and the potential upside is very high. Those are intelligent risks.

Control over outcome

When evaluating a course of action, look at whether you’re more likely to see the downside or the upside. What can you do to affect the likelihood of either?

Using only the upside/downside standard, playing the lottery would be judged as an intelligent risk: the only potential loss is $1, and the potential gain is several million dollars. So it’s looking good so far.

But what can you do to affect the outcome? How can you make yourself more likely to win? Only by buying more tickets, which also increases your potential loss. There is nothing you can do that actually increases the upside-to-downside ratio.

Investing in the stock market is similar. Even when the economy is booming, and there is a very good chance that the stock price will go up, there is nothing you can do to change what happens (other than, as Dolf de Roos points out, writing a letter to the board of directors, wishing them well).

When you invest in a rental property, though, there are things you can do to affect the outcome. You can experiment with advertising methods, and with incentives, to increase the likelihood of someone renting it from you. You can repaint, or repair the roof, or add a carport, to increase the rent that someone will pay in increase the likelihood of making back your investment. You have a great deal of control over the outcome.

Building a website and starting a workshop are also good risks, because you have a lot of control. When things go wrong, you have a lot of options to affect how things turn out. Even if things go poorly, you have control about how poorly it goes, and what the consequences are.

Ability to Recover

Related to control is the question of how well you can recover from the downside. This aspect depends on a lot of factors, including what resources you risked, what your situation is, and what your own skills and talents are. When evaluating a course of action, think about what you would do if the worst did happen, and you needed to recover from the worst-case scenario.

If you lost all the money you put into this, could you still pay rent? If no one signed up, would it send you into spiraling depression? If your house burned down, could you rebuild it?

The more easily you can recover from failure, the more intelligent the risk. What can you do to put yourself in a position where you could easily recover? If you save up so you have a month’s worth of expenses in your checking account and an emergency fund in your savings account, plus $600, the loss of that $600 will hurt a lot less than if you took it out of your emergency fund in order to try something out. If you know you have a tendency towards depression, make sure you have a support group standing by, aware that you might need help, and make sure that the other things that trigger your depression are minimized as much as possible. (If you think this project might burn your house down … learn carpentry, I guess? And please don’t do it in Colorado — we have enough fire problems already).

Plan for Failure

When I was learning to cook, I used to worry a lot about what would happen if I screwed up. Until my husband started saying, “In the worst case scenario, we throw it out and order pizza.” For most people, experimenting with a new dinner is an intelligent risk: the only possible downside is the loss of the materials you used, and the cost of your fallback meal; the potential upside is finding a new meal that you love. You can improve the odds that it goes well by reading reviews and comparing it to other meals that you know you do or don’t like, and by following the recipe carefully. And you have a plan for what to do if things go badly: you order pizza, or you make ramen, or you go out to dinner.

When you’re starting a business, have a fallback position also. When I started a business, I left a job that I knew would be happy to take me back. It was a kind of crappy job, that paid poorly, which is why I knew they’d be happy to hire an intelligent, pre-trained MBA, but it meant that I knew I could always get a paycheck if I needed one. That made starting the business a more intelligent risk, because failure wouldn’t ruin me.

You could have a large savings pool, so that you can afford failure for a year. You could have roommates or a spouse who will share expenses with you while you’re struggling. There are lots of options. But the better your fallback position, the better you’re able to take risks without worry.
Risk

What risk are you considering?

Resources for Further Reading
Should this Business Proceed?
Steve Pavlina – intelligent risk taking
Decisive by Chip & Dan Heath

Resources: How to Fail

Seth Godin recently posted a fantastic article on why and how to fail.

Favorite line: “There are some significant misunderstandings about failure. A common one, similar to one we seem to have about death, is that if you don’t plan for it, it won’t happen.”

If you’re going to fail, wouldn’t you like to fail correctly?

What is “Too Good to be True?”

Let it be noted that there are a lot of scams on the internet. I mean, there are a lot of scams everywhere, but the internet is a favorite medium due to its anonymity and relative novelty. So I guarantee you that you can, with little effort, find a website dedicated to separating people from their money without providing any value in return.

Almost as prevalent are sites dedicated to helping people spot and avoid those scams. Some are better than others, but almost every single one includes the line “Remember: if it sounds too good to be true, it probably is.”

What is “Too Good to be True”?

Am I the only person who doesn’t find that terribly helpful? I mean, yes, I agree that many con artists will try to lure you in with a deal that’s unsustainable. But it’s also true that a lot of weird $*!& goes on in the world. Who am I to say what’s realistic? I’m well-educated enough to know that (to a first approximation) I know essentially nothing at all. I’m also young enough to have seen dozens of rounds of

    It’s not Possible! ->
    Well, it’s possible but stupid ->
    Well, OK, sometimes it’s alright ->
    What are you talking about? Everybody does that.

So I just don’t feel like asking my gut to make a decision is the best heuristic. I mean, in most cases I have literally no data on the topic being discussed, and that’s what your gut uses to make its judgments. So I’d be just as well off flipping a coin.

Asking my social network is even worse: my friends’ guts are equally uninformed, and it only takes one loud idiot to make a bad group judgement.

The World is Changing

A lot of things are possible now that weren’t possible when I was born.

  • A store can make money — and drive competitors to bankruptcy — without any storefront at all.
  • An author can make more than $1,000,000 a year without any help from a publisher and without selling any paper books.
  • An advertising agency can get better results by not hiring any employees at all, and instead using only freelancers.
  • Jobs that used to require a commute and fixed hours are now done from your own house whenever you have time.

So there are a lot of opportunities out there that could only have been scams 30 years ago — it was simply technologically impossible to make them work — that are becoming commonplace now. “Too good to be true” has become not only a lot fuzzier, but a lot harder to judge.

How Does That Work?

So how about some new heuristics?

Ask When someone proposes an “opportunity” that you think might be a scam, ask them for more information. How does that work? Where do you get customers? Products? Funding? How do you get paid? What’s in it for me? What’s in it for you? What’s in it for them? Whether it’s a scam or not, you should never proceed until you truly understand what’s going on.

Research Of course, any con artist worth their salt can spin a line of BS that sounds convincing, so you should also research independently. Google is good for this, as is your local Business Bureau. Research the concept: are other people trying this? How long has this company been around? Does the technology work the way they said it does? Have other people tried this and liked it? Google “[Company name] scam” and see what comes up (do read whatever comes up — anyone can post a website saying that so-and-so is a scam, whether so-and-so is Bernie Madoff or the Red Cross. You have to judge for yourself whether either party consists of kooks, honest people, or some mixture of both).

Ask people in the industry Hollywood is forever creating tech-based plots that even fairly un-techie geeks like me can tell are flat-out impossible. Our guts don’t have enough data to make good judgement calls on most things, but there’s someone out there who can make a good judgement call on anything. So find someone who knows business to ask about this “investment opportunity”, or someone who knows tech to ask about this new “polarization regulator”.

Perform a Risk Analysis Still not sure? What do you have to lose? No, really, what do you have to lose? Knowing what you’re risking is a huge part of determining the best course of action. Plus, you get a nifty free download. :)

Let’s start making assessments on the basis of facts instead of fear.

Examples: When predictable is risky

In the last post I proposed that sometimes predictability is risky: when the “predictable outcome” is failure, you’re better off taking a chance on something that at least has a chance of success. We also discussed two examples: the playoff for MTG Player of the Year, and the last-second game-winning shot in a sports competition.

But there are lots of examples of risky stability

Lousy jobs
Hate your job, but stick with it because it’s “safer”?
Probability you’ll hate your job if you stick with this one: 100%
Probability you’ll hate your job if you look for another one, or make your own: 50%

Your job has much greater risk of frustration, depression, and misery.

New businesses
People like to make the same kinds of businesses as already exist, because they know that there’s a demand for it.

It’s a good idea to make sure there’s demand for your business. But doing so by competing in a crowded field is kinda crazy. Do you really want to be competing with Starbucks? With Wal-Mart?

The thing is, let’s be honest: you can’t compete with Starbucks. Almost guaranteed. If you go up against them, you will fail.

If you start a totally crazy business — like birthday parties for pets — there’s a chance you will fail. There’s also a chance you’ll find an untapped market that you can dominate easily since you have no competition.

Probability of succeeding with a coffee shop: 1%
Probability of succeeding with a birthday party for pets business: 50%.

New Products
When making a new product, most companies like to copy their competitors. Making an MP3 player? Look at what your competitors are making, and make a device that’s as close as possible to that.

Who didn’t follow that advice? Apple. I mean, look at the math. If you make a knock-off product, you’re guaranteed to sell a few units, but you’re guaranteed not to sell very many, since someone else already beat you to the market. And you’re going to spend millions on R&D and advertising. The only way to make money on that is if you sell lots of units, not just a few. Apple put the effort in to make an MP3 player that was completely different from their competitors’, and hit it out of the park. (Yes, there were MP3 players before iPods. They just didn’t catch on. Companies copied them anyway).

If the iPod had been a flop? Well, you’re investing millions anyway. Honestly, the difference between losing $1,000,000 and losing $900,000 isn’t that significant, and that’s what you’re risking with the knock-off product. Whereas the difference between making $100,000 and $10,000,000 is pretty darn significant.

Probability of making money on a knock-off product: .5%
Probability of making money on a brand-new, unique product: 50%

Are you in a situation where predictable is risky?

Still, there are a lot of situations in which predictable really does mean safe. How do you tell?

With this simple questionnaire! (Free Risk Analysis Download)

What’s the downside risk? If it all goes to heck in a handbasket, if Murphy steps in and your worst nightmares come true, what do you stand to lose? Money? Time? Reputation?

What’s the magnitude of the downside risk? Whatever you stand to lose, how much do you stand to lose? Usually this is your initial investment: if it will take you four hours a week to write a blog, then you stand to lose four hours a week. If it will take $1,000 to get in on this investment, you stand to lose $1000. If it will take you $100 to start this business, and you’ll be able to tell by the end of the month whether it will succeed, then you stand to lose $100, a month, and the respect of all your so-called friends who are lining up to say “I told you so”.

What’s the probability of failure?
In most cases, you’re making this up. I’m not asking for an exact number, just a gut feel. Very high? Fairly now? Fair-to-middling?

What’s the upside risk?
If this succeeds, what would you get? Money? Fame? Fast cars? Attractive members of your preferred sex volunteering to clean your house?

What’s the magnitude of the upside risk?
If this took off like you secretly hope for, if everything went right
and you were an overnight success, how much of that awesome stuff would you get? Hundreds of dollars? Hundreds of thousands of dollars? Your name known in every household in your town? Your country? The world? (I’ll leave the attractive housekeepers to your imagination).

What’s the probability of success?
Again, this is normally impossible to calculate, but make your best guess. Probable? Not bloody likely? Yeah-maybe-possible?

What’s the alternative?
Finally, what will happen if you don’t take this risk at all? What if you let sleeping dragons lie, ignore this opportunity, and continue with your life as it is right now?

Whatever units you used for your upside/downside risk (dollars, days, hot chicks/hunks), express the status quo in those units. How much money will you have if you continue with this job/ don’t start a business/ buy apple products instead of apple stock? How many fast cars do you have currently?

Put it all together

  • If the downside risk is significantly worse than the status quo, and the upside risk is pretty low, then this is a stupid risk. Stick with what you know.
  • If the downside risk and the upside risk are about the same distance from the status quo, then check the probabilities. And ask yourself: do I feel lucky?
  • If the upside risk is significantly better than the status quo and the downside risk is about the same as the status quo then this is a great opportunity. You are, as Julien Smith would say, being a *@^#*@ wuss. Get off your butt and take a chance.

Resources for Further Reading
Play it safe … and experiment

When more volatile is less risky

What is “safe”?

In the investment world, a safe investment is one that doesn’t move very much. It’s not very volatile. It’s predictable.

We like predictable. They’ve done studies that show how humans (and chimpanzees) like to pick the certain choice, even when the less-certain choice has a better chance of high benefit. We can get a little more excited about random chance when we have the chance to gain money (see: Las Vegas), but when it comes to potentially losing something, we shut right down. We hate chance. We hate uncertainty. We want to be safe. We want to know what will happen.

Overall, the safe = less volatile thing is a pretty good rule of thumb. As far as saving time and mental energy while yielding reasonably accurate results, it does a good job, most of the time.

But like any rule of thumb, it’s wrong sometimes. This post is about when it’s wrong.

What if the certain route is certain failure?

In the competition for MTG Player of the Year, Guillaume Matignon faced a bad situation: the cards he had were simply not as good as the cards his opponent had. They were good, and made a strong, consistent deck, but unfortunately they made a strong deck that was consistently slower than his opponent’s.

So he had a choice. He could play that strong, consistent deck. This is the “safe” option: it has a very predictable outcome. But that outcome is that he loses.

Or he could play a less consistent deck. One that — if it works — can work spectacularly and win him the game and — if it doesn’t work — will cause him to lose the game much more quickly than he otherwise would have. This option is much more volatile: he has no idea, going into the game, whether he will win hard or fail hard, but whatever he does, it will be fast-paced and intense.

What’s the less risky option?

Traditionally, we associate volatility with risk, so we would say that the first desk is less risky.

And yet, something has clearly gone wrong when you look at a situation and say “You should do the thing that’s guaranteed to fail — it’s less risky.” I mean, we try to avoid risk so as to improve our chances of success. When we box ourselves into a nice, safe, jail, we have to have taken a wrong turning somewhere.

Let’s look at a situation we’re more familiar with: there are 5 seconds left in the game, and your team is down by 1.

If you don’t take the shot, you have a very predictable outcome: you lose. If you DO take the shot, you have a less predictable outcome: you might make it, and win or tie the game. Or you might miss, and lose. Taking the shot is more “risky”, more volatile.

But everyone agrees that you take the shot. It’s your only chance of winning for heaven’s sake!

And that’s the thing. Sometimes volatility is your only chance of winning. And in those cases, although that option is volatile, it’s also less risky.

How will this help you win?

It all goes back to the fundamental decision-making question: what will help me win?

If reducing volatility will help you win, then it’s a good thing. And that’s very often the case.

But sometimes your only chance of success is to take the outside shot, to try drawing to an inside straight. If you fail, you are in exactly the same situation as if you didn’t try for the outside shot.

So you may as well try it.

Epilogue:

Guillaume Matignon played the more volatile deck. He got lucky draws and won the game, but lost the overall playoff in other games.

.

Resources for Further Reading
Dangerous? Or Gutsy?
Intelligent Risk Taking