Every decision you make in the business world has some sort of risk attached. The key to being successful in the long run is taking calculated risks that minimize negatives and maximize positive outcomes. Have you mastered taking calculated risks, or are you still working on it?
Foolish vs. Calculated Risk Taking
All risks are not created equal. There are big differences between foolish risks and calculated risks. The key is to learn how to decipher one from the other.
In the most basic sense, a foolish risk is a risk that is undertaken without performing any due diligence or accounting for the possible negative consequences. In other words, a foolish risk can deliver a positive return, but you’re going into the situation blindly and don’t know what’s actually waiting on the other end. You’re essentially rolling the dice.
On the other hand, a calculated risk involves a fair amount of research. The results won’t always be positive, but you’ve done enough legwork to know that the chances of success are higher than the chances of failure.
Ultimately, this debate over foolish vs. calculated risks is what leads many entrepreneurs to become risk averse. We start to weigh the pros and cons and the pessimist inside of us screams louder than the optimist.
Generally speaking, we shy away from risk taking for the following reasons:
- Unrealistic probability of failure. In reality, the risk of something not working out is often much lower than we estimate. By nature, most of us are pessimists and give risks an unrealistic probability of failure.
- Exaggerated consequences. Even if we set the odds correctly, we often have a tendency to exaggerate the negative consequences. We come up with unrealistic worst-case scenarios and assume that the risk will end up going this route.
- Inability to handle the consequences. Finally, it’s not uncommon to underestimate our ability to handle the consequences of risk. Sure, something bad could happen — but, in most cases, it’s something you can handle.
Do any of these sound familiar? While you may have other names for them, these are nothing more than excuses. If you understand how to hone in on calculated risks while pushing foolish risks aside, you should have no trouble taking chances.
6 Tips for Taking Calculated Risks
While blatantly foolish risks are often easy to spot, it’s the disguised risks that play tricks on you. In order to increase your chances of only taking calculated risks with the potential for high returns, keep the following tips in mind:
1. Do Lots of Research
The first tip is to do your due diligence. In order to take a calculated risk, you must understand every little detail and nuance of the decision that you can. This gives you time to discover red flags and potential issues.
In order to understand the importance of research, let’s look at an example. Think of yourself like a sports bettor. While some may consider successful gamblers lucky, they are actually very savvy individuals. They conduct lots of research and never base a decision on emotions.
Successful bettors understand the importance of leveraging the resources they have around them — such as handicappers — to increase their chances of success. For instance, let’s say a sports bettor is looking to place a bet on an NBA game that takes place tonight. They would never just look at the scoreboard and place a bet. They would review picks from a reputable handicapper, analyze the trends, and search for the best lines.
As an entrepreneur, you need to do the same. Any time you have a decision to make, you should call a trusted advisor, analyze the numbers, and negotiate the best deal. Only then can you ensure a risk is a calculated one.
2. Anticipate Mistakes
A smart risk taker can anticipate potential mistakes and account for them. Before executing any decision, you should think about every possible outcome. Consider the positive ones, but really focus on the negative ones.
If the deal lost money, how would your business respond? If a partnership is broken, what course of action will you take? If the project falls behind, how will you meet the deadline? You need to ask questions like these.
Along this same line of thinking, recognize that too many potential mistakes likely indicate that the risk is too high. If you keep rattling off practical mistakes that could take place, then consider moving in another direction
3. Set Checkpoints and Goals
When taking a risk, the end goal or return may be months or years away. How do you stay the course when there’s so much time between the start and finish? Well, it involves the careful identification and implementation of checkpoints and goals.
While you’ll often hear people discuss the importance of goal setting, most of the conversation revolves around the significance of long-term or “end” goals. You don’t hear a lot of discussion about short-term goals and checkpoints. And while the end goal obviously matters, you could argue that these checkpoints are more important, as they keep you on track.
Calculated risks are marked by a number of goals and checkpoints. Put these in place well before making a decision so that you can identify when risk becomes too high for your tolerance.
4. Be Willing and Ready to Pivot
It doesn’t matter how calculated a risk is, you must be able to handle what happens. A business decision rarely — if ever — goes exactly as planned. Sometimes the outcome will be better than anticipated, while sometimes it will be worse. And while you can’t always control the result, you can control how you respond.
Overall, you should be ready and willing to pivot at a moment’s notice. For example, let’s say you embark on a project knowing that you have a $100,000 budget. Then, three months into the six-month long project, your budget gets slashed to $65,000. If you sit there and slam your head against your desk, you’re probably going to fail. However, if you’re willing to pivot, you’ll head back to the drawing board and figure it out.
While you often hear about entrepreneurs who took on serious risks, beat the odds and found success, you don’t always hear about what happened behind the scenes. In most of these situations, there were things that went wrong. However, the decision makers were willing and ready to pivot in order to find success.
5. Learn to Love the Word “No”
Whether it’s in your personal life or your career, learning to say no is one of the best skills you can adopt. This is especially true when it comes to a risk or potential opportunity. If you jump at every opportunity that comes across your desk, you won’t have time or space to take on the ones that have a high probability of succeeding.
“Whatever the psychological back story, whatever the reason, the fact remains that saying yes to too many things is overwhelming and counterproductive,” writes Camille Preston, CEO of a leadership company. “By saying yes to too many things, we may be saying no to some very important things. If our plate is too full, there’s no room for the unexpected or ideal opportunity.”
6. Jump When the Water Feels Good
Have you ever met an entrepreneur who is adept at doing due diligence, but never pulls the trigger on an opportunity? Perhaps that entrepreneur is you. While you aren’t alone, you do have to overcome your fear of action before inaction becomes commonplace.
If you’ve done your due diligence and the water feels good, then take the plunge! There comes a time when you have to jump. Is it scary? Certainly. Are there unknowns? Absolutely. But you must trust your instincts and rely on your research. If you don’t jump now, you may never jump in the future.
Say “Yes” to Calculated Risks
When it comes to risks, you want to say “yes” to calculated risks and “no” to foolish risks. Sounds simple, but that’s all there is to it. Acquire this skill, and you’ll be set for the future.
Abacus Photo via Shutterstock
