How Do You Know Which Are The Good Versus Bad Risks?
Updated: Jan 2, 2021
Risk versus Reward
I am extremely risk-averse. I would have been an awful trader in my previous career. It would have been impossible for me to stop thinking about the job at the end of each day.
And yet I chose to walk away from a highly desirable role, one full of status (title, office, assistant, resources) and highly rewarding monetarily, to do something entirely different in the second half of my career. At the time, my peers were shocked. Managing Directors rarely voluntarily leave and go into the risky unknown world outside their safety bubble.
So how did I make the decision and get happy with the risks and rewards, and compare the good versus bad risks?
For me, deciding to leave full-time banking and the Chief Operating Role was the less risky option relative to the status quo. By considering everything important to me: my family, my relationship with my wife and children, my health - both physical and mental - it became more and more clear what I needed to do.
We all need help to make decisions and to assess risks whether you are a busy professional, an entrepreneur or a freelancer. The choices you make have good and bad risks, whether it is a career decision to go for a new role, leave a job or try something new like me. How to assess the trade-offs involved with allocating scarce resources, or where to invest or to cut back. Which services and products to grow or the need for a timely pivot in another direction. Poor choices hurt careers and businesses.
I have previously written about powerful decision-making frameworks (link below), in this article, I will share with you ways to enhance your thinking around risk, why everything is relative to not changing and how to plan for and mitigate asymmetric downside risks.
So how shall we define risk? It is common to talk about risk versus reward. The risk/reward ratio marks the prospective upside an investor can earn, for every dollar, pounds, euro at risk on an investment.
Many investors use this ratio to compare the expected returns of an investment with the amount at risk to earn said returns, which is an excellent approach for when the decision has numbers. Often we may face an absence of reliable figures, or the numbers lack a high degree of certainty. I propose looking at good risks versus bad risks when the reward is unknown or highly uncertain. By doing so, we can better assess strategically important decisions.
Good and bad risks
What happens if the decision goes sour, and the primary expected outcome doesn't materialise? Are there secondary and tertiary benefits, let us call them good risks? Good risks could take the following forms and may, over the longer-term end up being more valuable to your career or business than the original goal behind making the decision:
Is there a very high likelihood of developing new skills or deepening existing ones that are transferable?
Will you have the opportunity to build enduring relationships that may help you with future decisions?
What could you learn that you wouldn't know otherwise?
What else is there for you?
When making decisions, make sure you spend time to identify these good risks, the extra benefits that will materialise. By doing so, you will have a higher chance of winning even if a project fails!
Bad risks are those risks that we could have identified and mitigated if we had adequately planned and analysed the decision and broader situational context. Here are four bad risks that you may be taking:
Not planning and preparing - for important decisions, you should use different scenarios (best, base, worst case etc.) but remember that because of the likely high degree of uncertainty we can make forecasts confidently. Yet, we may not be able to have high certainty. You may not anticipate what does happen, and often the scenario you envisage doesn't materialise. Still, by being disciplined, the plans you have and the readiness to act will be highly valuable as often parts are transferable.
Plans are useless, but planning is indispensable.
President Dwight D Eisenhower
Being too busy and therefore, not spending the time necessary to thoroughly analyse and understand the choices you face. Being too busy is an excuse. Making decisions is a core principle of effective leadership, so make the time. Prioritise by using a tool such as the Urgent / Important matrix [link below] to help you focus on what will make you most effective, not just efficient.
What does the other party want? Is this a win/win situation, or does one of you have to lose for the other to gain? Put yourself in the other person's shoes - what is their ideal outcome, is it closely aligned with yours, if not, why not? What needs to happen to bring the two closer together? When there is more than one party involved, not thoroughly understanding their point of view is likely to increase the chance of misunderstanding and conflict.
Not identifying the risk of doing nothing. One should not analyse and assess the decision in isolation, whether it is to invest in a coach, or to move jobs, to accept the new responsibility, to hire that person. Don't just look at the potential upside and downside and pros and cons for the new option. It would be best if you were comparing it to the status quo as doing nothing, not changing, is a decision. Doing nothing may be the riskiest option.
Be prepared for failure and ready for success.
In the book "Why CEOs Fail" (David Dotlich and Peter Cairo), they identify eleven reasons why leaders fail. Paraphrasing, they state that:
"Leadership failure is a behavioural phenomenon. It doesn't just happen. It's not just the result of a downturn in the economy or other events over which we have little control. Leaders fail because of how they act, especially under stress; they respond with a pattern of behaviour that can sabotage their jobs and careers."
"Excessive caution" - Leaders who are too cautious and cannot make decisions, is one of the eleven derailers. Those leaders don't have frameworks to aid with important decisions or for assessing the risks involved, and hence they get stuck.
Use this approach to help identify your risks when making strategically important decisions. The good ones that could help you succeed even when a project fails. Spend the necessary time to seek out the bad risks to mitigate them. By doing so, your next career transition, investment in a project, pivoting your offering or making a hiring decision will have a higher probability of leading to a successful outcome. Better choices and decisions will lead to more success and rewards.
If you want to find out more, check out these articles:
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