Why Successful Entrepreneurs Need To Be Calculated Risk ...

Risk taking is fundamental to sound investing. ... worth taking. That's the process I go through to calculate risk and make decisions.”. BETAThisisaBETAexperience.Youmayopt-outby clickinghereMoreFromForbesMar31,2022,01:40amEDTCorrectThisMistakeWithAgingParentsBeforeIt’sTooLateMar30,2022,05:20pmEDTBornInSecondHalfOf1949?ActByApril1ToAvoidRMDPenaltyMar30,2022,03:17pmEDTHowMuchDoYouNeedToSaveForRetirementToBuyAnAnnuityThatYieldsEnoughIncomeForYou?Mar29,2022,01:09pmEDTIfYouReachedAge72In2021,YouMight(OrMightNot)HaveUntilApril1,2022ToTakeYour2021RMD.Mar29,2022,09:00amEDTMakeTimeToStartAndFinishYourEstatePlanMar29,2022,08:30amEDTWhyMillennials,GenX&RetiringBoomersNeedToFindTheirHappyPlaceMar28,2022,10:45pmEDTAgingParentsWithCognitiveImpairment:TheStressOnCaregiverSpousesMar28,2022,03:56pmEDTHowTheIRS’sNewRMDTablesFor2022AffectYourRetirementEditStoryEditors'Pick|Aug7,2020,10:44amEDT|WhySuccessfulEntrepreneursNeedToBeCalculatedRiskTakersChrisCarosaSeniorContributorOpinionsexpressedbyForbesContributorsaretheirown.RetirementIhelpfamilies/smallbusinessesdiscoverwealth-buildingstrategies.SharetoFacebookSharetoTwitterSharetoLinkedin getty ProfessorMarshallKetchumeyedtheyounggraduatestudent.Hiscolleague,ProfessorMarschak,formerdirectoroftheCowlesCommissionforResearchinEconomics,haddirectedthestudenttogetareadinglistfromthelearnedacademic.ThatstudentwouldgoontowintheNobelPrize.Anditwasallbecauseofoneofthebooksonthatlist,abookwrittenbyJohnBurrWilliams. Whenyoutalktopeopleaboutwhatittakestobean“entrepreneur,”mostpeoplewillsayyouneedtobearisktaker. Whenyoutalktopeopleaboutwhatitmeanstobea“risktaker,”mostpeoplewillbegindescribingdaredevilsandgamblers. Inbothcases,theseanswersareatbestincompleteifnottotallyincorrect. Risktakingisfundamentaltosoundinvesting.Withoutrisk,therecouldbenoreturn.It’sactuallyassimpleasthelawofsupplyanddemand. Here’sanexample:Wouldyourunacrossabusy7-laneinterstateforadollar?Probablynot.Wouldyoutakethatchanceifthepayoffwasamilliondollars?Manywould. Iftherewardistoosmall,it’snotworththeriskrequiredtoobtainit.Iftherewardislargeenough,you’dbewillingtotakeonmorerisktoobtainit. Thisiscalledthe“Risk-ReturnTradeoff”anditformsthebasisof“PortfolioTheory”—thebedrockofmoderninvesting.NobelPrizewinnerHarryMarkowitziscreditedwithfirstarticulatingthis.AccordingtoMarkowitz,“ThebasicconceptsofPortfolioTheorycametomeoneafternooninthelibrarywhilereadingJohnBurrWilliams’sTheoryofInvestmentValue.” MOREFROMFORBESADVISORBestTravelInsuranceCompaniesByAmyDaniseEditorBestPandemicTravelInsurancePlansByAmyDaniseEditor Entrepreneursmakedecisionsjustlikestockinvestors.Theonlydifferenceisentrepreneursinvestintheirownbusinesses,whilestockinvestorsinvestinotherpeople’scompanies. Sinceriskandreturnaretwopeasinthesamepod,youcan’tdefinerisksolelyintermsofitsdaredevilpersonaoritsrelevancetogambling. Likewise,anentrepreneurisnotnecessarilyarisktaker.Successfulentrepreneursknowhowtomanagerisk. Here’sanexample. Takeafairpenny.Ifyouflipit,there’sanequalchanceitwilllandonheadsortails.Ifitcostsyouadollartoflipandyougeteightycentsbackifyoucancorrectlyguesswhetheritwouldlandonheadsortails,wouldyoutakethatbet? No,becauseevenifyouguesscorrectly,you’restillouttwentycents. Whatifyoucouldwinadollarforguessingcorrectly?Wouldyouplay? Thisisatrickierquestion.Onthefaceofit,itsoundslikeyouwouldn’tcareonewayoranotherbecauseifyouwin,allyou’llgetbackisyouroriginaldollar. Butyoushouldcare.Andyoushouldalwayssay“No!”tothisgame. Why?Becauseyourchanceofwinningisonly50%.Thatmeans,onaverage,you’llonlywinfiftycentsforeverydollaryoupay. Atwhatpointdoesitmakesensetoplaythegame?Well,ifyouraveragepayoffisonlyhalfwhatthewinningrewardis,andyouwantto,onaverage,recoupyourdollarinvestment,thatrewardwouldhavetobeaminimumoftwodollars.That’sbecauseyouraveragepayoffwithatwo-dollarrewardishalfthatreward,oronedollar. Riskmanagersalwayspayattentiontotheoddsofobtainingtheirpayoff.Entrepreneurs,therefore,focusonmaximizingtheirchancesofgettingtherewardbyminimizingtherisksinvolved.Inthisway,winningentrepreneurscanbetterbedescribedas“riskavoiders”ratherthan“risktakers.” Now,don’tthinkthere’snoriskinvolved.Anynewventure,whetherbusinessorpersonal,entailsunknowns.Andunknownsmeanthere’srisk.Entrepreneursembracethisrisk,notriskingeneral,butaspecialkindofrisk.ResearcherSallyCairdcallsit“calculatedrisktaking”anddescribesitthisway: “Calculatedrisk-takingisoperationallydefinedastheabilitytodealwithincompleteinformationandactonariskyoption,thatrequiresskill,toactualizechallengingbutrealisticgoals.” Academicsaside,experiencedentrepreneursrealizesuccessonlycomeswhentakingaleapoffaith.“Ifyoudon’ttakechances,youwon’tmoveahead,”saysVincentZurzolo,COOofMetropoliscomics.comandComicConnect.cominNewYorkCity.“Everyentrepreneurhastotakechancestogetthedealstheywant,todrivetheirbusinessforward,andreachaplacewheretheycanbefulfilled.” Theopportunitytopracticecalculatedrisktakingdoesn’tariseinmostestablishedbusinesses(unlessyou’retheCEO,and,eventhen,sometimesit’sbettertoplayitsafe).Asarule,therefore,asuccessfulcorporatecareerwillnotnecessarilytranslateintoasuccessfulentrepreneurialexperience.Infact,thesepathsmayrequirecontradictorytraits. “Changedoesn’texistwithoutcalculatedrisk,”saysThymeSullivan,Co-Founder&CEOofTOPtheorganicprojectinDuxbury,Massachusetts.“Mycorporatebackgrounddidnotencouragerisk,itwasinfacttheopposite.Ifyoustayedinline,didthingsastheyhavealwaysbeendone,itwassafe,regardlessoftheoutcome.Tobeaneffectiveentrepreneuryouhavetountrainyourselftodowhateveryoneelseisdoing.WeweretaughtinschoolandcorporateAmericatostayinlineandfollowtheplaybook.Youhavetofightthatmusclememoryandfollowyourinstinct,whatyouknowtobeacalculatedrisk.Onceyouexercisethisfreedomofthoughtandactionitjustfeelsright,it’sresonance.” Beforeassessingyourself,youmightbenefitfromstudyingthepeoplearoundyou.Dotheyaspiretoconformity,oraretheyconstantlysearchingforthecomingthing?And,ifthelatter,dotheyridewilly-nillydowntherabbitholeofunconstrainedthought,ordotheycontemplatewhatthepathofleastresistancelookslike?Seeinghowothersthinkanddothingsmayhelpyouunderstandthementalexercisesyou’llhavetopracticeinordertomakecalculatedrisk-takingsecondnature. “Ialwaysfinditfascinatingthatsomepeopleremainuncomfortablycomfortable—perhapsmaskingtheirunfulfillmentwithvariousthings;whereas,someofus(especiallyentrepreneurs)arewillingtogetuncomfortable—insomeways,welivethere,”saysMollieKrengel,FounderofWildBuminMinneapolis.“It’slikebuildingamuscle.It’snoteasyandittakespractice,butwecanactuallystarttoenjoyit.Calculatedrisksbegintofeelgoodandwhentheydon’twork,weadaptandmakechanges.IcannotimaginealifewhereIamnottryingnewthingsandstretchingmyself.” Haveyoueverheardof“paralysisbyanalysis”?Thisoccurswhenyouanalyzesomethingfarbeyondtheusefulnessofadditionalanalysis.Itgetstothepointwhereyoufailtomakeadecisionbecauseyou(falsely)feelmoreanalysisisneeded.Manyhavemissedtheir“GoldenRing”opportunitybecausetheyhavebeentooafraidtomakeadecisionwhenthey’reintheRedZone.Tothem,takingany“premature”actionwouldbeakintobettingontheponiesatthelocalracetrack. Cairdwarnsthatthosewhoscorelowonthe“calculatedrisk-taking”scaletendtohave“acautiousnature;apainstakingapproachtodecision-making;andapreferenceforworkingwithcertainty.”Successfulentrepreneursusecalculatedrisk-takingtoovercomethisphobia. “Insteadofbeingparalyzedbyfear,youmakenecessarycalculationsandthendecideifyoushouldlaunch,”saysDavidLowe,Co-Founder/ChiefMarketingOfficeratGuardiaMedicalinSanDiego.“Peoplemistakethisasgamblingwhichistotallyincorrect.Youaretakingacalculatedrisk.Beingarisktakergivesyoubigreturnsifyousucceed.Ittakesyearstodevelopthispartofthebrainbecausethatpartofyourbodyistryingtoprotectyouandtellyoutoplayitsafe.Entrepreneurshipisasmuchaboutmasteringthementalsideofbusinessasitisthephysical.” Howpreciselydoyougoaboutcalculatingyourrisks?First,itstartswithyouknowingyourself.Doestheunknowntakeyououtofyourcomfortzone?Ifyoudon’tthinkitdoes,thenyou’llneverknowhowtomanagethatrisk.Everyonehasacomfortzone.Youbetterfindoutwhatyoursisbeforemovingon. “Everyonehasacertainlevelofrisktolerance;somequitehigh,somequitelow,”saysJulieBee,PresidentandFounderofBeeSmartSocialMediaandLeadFromAnywhereinCharlotte,NorthCarolina.“Startingandoperatingabusinessrequiresatleastamoderatelevelofrisktolerance.It’simportanttofirstknowwhereyourownrisktolerancefalls.Thenyouhavetogetgoodatcalculatingthepotentialriskofmajordecisions” Onceyoudetermineyoursafezone,youcanassessthevariousrisksassociatedwithyourburgeoningidea.Thisiswherethefunpartbegins. “Myruleofthumbistothinkthroughtheworstthingthatcouldhappenandthebestthingthatcouldhappen,fromanyriskyoutake,”saysBee.“It’slikelytheendresultwillfallsomewhereinbetweenthosetwothings.Ifyoucantoleratetheworstthingthatcouldhappen,andtheriskhasapotentialgreatbenefittoyourcompany,thentheriskisprobablyworthtaking.That’stheprocessIgothroughtocalculateriskandmakedecisions.” Whatmightyouseeinyourselfthatwouldindicateyouareacalculatedrisk-taker?AccordingtoCaird,youscorehighifyou’vedemonstrated“theabilitytojudgethatariskisworthtakingwhentheconsequencesoffailuredonotoutweightheincentivevalueofsuccess;theabilitytomakedecisionsinuncertainconditions;andthetendencytomakedecisionswithoutexhaustivelygatheringinformation.” So,areentrepreneursrisk-takers?Notinthewayyouthink.Sure,they’renotafraidofrisk,buttheyseektodiminishitbymanagingit. “Entrepreneursarenotinherentrisktakers,butrathercalculatedrisktakers,”saysChinBeckmann,CEO&Co-FounderofDSPConceptsinSantaClara,California.“Itisimportanttofirstandforemostunderstandtheproblemsyouaresolving;ittakesinsightandexperiencetofindnew,sustainableandeffectivesolutions.Simplycomingupwitharandomideaandusingotherpeople’smoneyrecklesslycontributesto90%offailedstart-ups.” Manythinkthesecrettobecomingasuccessfulentrepreneurliesintheuniqueideayoudiscover.Whilethiscanhelp,manyuniqueideasfallflatuponexecution. Why?Becauseofafailuretomanageriskproperly. Followmeon Twitter or LinkedIn. Checkout my website or someofmyotherwork here. ChrisCarosaPrintReprints&Permissions