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.

What risk are you considering?

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

  • aberrantwolf

    The is very relevant to my life right now. Because I’m at a point where I feel like I need to either start taking risks or accept that I will forever be working for other people on other people’s projects. And the latter is not something I should like to have ended up doing.

    • pingela

      I’m currently reading Stumbling on Happiness by Daniel Gilbert, about all the reasons that our past selves were pretty bad at guessing what would make us happy now, and our present selves are pretty bad at guessing what will make our future selves happy. One of the things he discusses is how bad we are at predicting what we will regret. We FEEL like we’ll regret dumb actions more than dumb inactions. But in fact, we’re pretty good at finding the upside to dumb actions (“Well, at least I learned something” “Well, at least I did SOMETHING” “Well, it got me moving”), but it’s much harder to find an upside to dumb inactions.

      When you take into account Julien Smith’s point that the worst case scenario is hardly ever actually very bad, It’s pretty clear that whatever you’re thinking of is almost certainly worth the risk. The trick, I think, is to have a plan for what kind of risk you’re going to take, and how.