Comfortable With Risk
For the majority of us, risk taking can make us uneasy. Risk is inherent in almost everything we do, but our ability to weigh up the likelihood of that risk changes according to the situation. Consider the risk of embarking on a new venture, where you’ve never worked in that particular market before. Many organisations, for example, would directly shun this risk for a number of reasons, and other organisations may welcome it with open arms. This raises the question; how do we get comfortable with risk?
Being comfortable with taking risks can be incredibly empowering. It allows us to make decisions which we may not have otherwise not taken, and it also allows us to fully exploit the risk-reward ratio that these risks present. A lot of the time, these benefits are very, very attractive. Other benefits include building our confidence and knowledge, as well as spurring creativity and resilience. Perhaps the most prevalent of these benefits is that your risk tolerance can increase, which makes future risk taking more comfortable.
Although risk taking has a number of benefits, many people and their organisations are unwilling to take risks. This is perhaps the biggest risk of all; because if we fail to innovate, we fail to survive. This failure is usually rooted in mindsets that fear change, growth and innovation, as well as the idea that the risk is ‘not what we do’. A lot of the time when it comes to decision making to embark on a risk, organisations may lack evidence of past success when they are venturing off into something new. This acts as a deterrent.
To combat this conservative mindset, one of the primary positions we can take is to look at the reasons to take the risk rather than to not take the risk. This assumes that you have to take the risk, but it then becomes a matter of choosing the option that accommodates best to your risk appetite. This is a really proactive approach to take when choosing between different risky options, and the focus typically falls on which has the best outcome. That being said, there are a number of factors that we need to be aware of when assessing and taking risks. I’ve outlined some of these below.
Don’t confuse risk taking with gambling
While risk taking and gambling can be considered one and the same, they’re fundamentally different. The first key differentiator is that you can, to an extent, control risk, whereas you cannot control the chance involved in gambling. The second key differentiator is that risk taking requires consideration of all outcomes, whereas gambling doesn’t quite consider these to the same extent. This essentially sees risk taking as much more deliberate to gambling, with the latter tending to be much more whimsical. The third key differentiator is that evidence-based management is best practice for risk taking, whereas it isn’t the needed approach for gambling. Differentiating between these two concepts can help alleviate the psychological turmoil that comes with taking risks.
Calculated risks
Calculating risk allows us to move away from choices that resonate with gambling. Doing so allows us to identify the riskiness and severity of an outcome. A popular way to do this is through use of the ‘Risk = Likelihood x Severity’ equation. This is best plotted on a heat map, which allows us to visualise what we’re comfortable and not so comfortable with. This is a quantitative approach and is relatively simplistic to design and easy to interpret. Although calculating risk is key, it is only one half of the overall approach. The latter half needs us to consider the rewards for taking the risk. This includes consideration of cost and benefit, as well as asking ourselves questions like ‘what does this mean for our financial wellbeing, strategic wellbeing, and operational wellbeing?’. While the financial element of this approach may be quantitative, other impacts that we may like to consider will typically be qualitative in nature. Whatever the answer may be to these questions, you need to be prepared to account for them and weigh them up in your decision-making process regarding the risk. Working and brainstorming with your team or a third party in this instance can help to capture all of the possible risks and outcomes, ultimately allowing you to take the most appropriately calculated risk.
Map the worst-case scenario
After we ask ourselves questions which could lead us to taking certain risks and not others, we need to consider what we’re prepared to lose. One of the most effective ways to do this is by considering the worst-case scenario, and then deciding whether or not we’re prepared to take it on. If we think back to the questions that we asked ourselves when calculating risks, we can consider the worst case in each of these contexts. An example could be significant financial loss, but high conformance to strategic objectives – which one is more important, and which one are we prepared to lose, or gain? It’s also valuable to do this with different variables of the risk activity to see how it changes the end result, so that we’re able to compare between different projected outcomes to help guide our decision-making. Much like the calculating risk topic we mentioned earlier, this mapping exercise is best done with a team or with a third party involved in the decision-making process.
Be prepared to fail and be prepared to learn
Not all failures are only failures. Failures carry with them important lessons, of which can be stored and used in our future risk-taking activities. The obvious benefit of this is that we’re able to avoid making the same mistake twice, because we now know what not to do and why. This can be beneficial for strengthening your organisational learning and capacity for future risk-taking activities.
Be adaptable and be iterative
When we decide to tackle a risky decision, we’re going to need to be conscious of the risks and hiccups that are likely to arise along the way. We also need to be mindful of those risks that might arise that weren’t initially on our radar. For this reason, we need to be adaptable and iterative in our approach to risky projects and ventures, ranging from anything such as knowing when to change our approach all the way through to knowing when to call it quits. Trying to make a project work can sometimes cause more damage than it does good. As we mentioned earlier, this links back to calculated risk. Ultimately, being adaptable and being iterative should be an ongoing activities throughout a project as opposed to a one-off event.
Understand the risk in not taking risks
One of the biggest risks you can take is to not take any risk at all. Without risk, we risk losing the opportunity for change, innovation, and creativity. We also risk losing the opportunity to learn, grow and evolve. Each of these elements can be crucial for allowing us as individuals or our organisations to maintain a competitive edge. Losing these opportunities can quietly hinder the well-being of our future and our progress more broadly, to the benefit of those who are comfortable with taking those opportunities.
Ultimately, risk taking is an intimidating process and action, but it is necessary if we want to move forward. Wayne Gretzky framed risk taking nicely when he commented that ‘you miss 100% of the shots you don’t take.’ There are benefits to risk taking, but we are only able to gain them if we effectively calculate the risk that we are taking and if we’re prepared to take on whatever may ensue. Even if we fail in our activity, we are able to walk away from the venture with new learnings, of which can help us in our future decision-making approaches and choices. In the most basic sense, we need to know how to be comfortable with risk.
If you have any stories – good or bad – about the techniques and approaches you’ve used to get comfortable with risk, I would love to hear them.
If you’re looking at improving your decision-making techniques and abilities when it comes to risky situations, or if you need some advice on a business decision, please contact me. I’m more than happy to have a conversation to help guide you on your journey.
