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