How Embracing Risk Actually Minimizes Loss

Risk is everywhere. It’s in every choice we make on a daily basis.

What is risk, though?

Economists define risk as ‘opportunity cost’ or the cost of doing one thing versus something else.

For example, if you spend your last dollar on bubble gum, you have gained the opportunity to chew bubble gum at the cost of not having a dollar to buy more calorie-rich food with. And if you move your family to a new city you gain the opportunity to live in a new part of the country at the cost of knowing your way around town (at least for a while).

You may define risk differently.

To you, risk may be your source of adrenaline. Like base-jumping or skydiving. forehead slap

Your preferred risk may be more business-oriented, as in “I have a great idea, so I’m going to go for it and spend hundreds of thousands of borrowed dollars despite my team’s pushback.”

Some would consider that leadership. If the idea has been properly vetted and measured against a crystal ball, then I would too.

But often our crystal ball is clouded with our own experiences and dreams, and there’s scarcely room for truth or a deep level of honesty about what is really possible with the introduction of our new widget.

If risk is simply trading a known cost for a known opportunity, why is it so hard to take risks, then? Why do we equate risk as being equal to loss?

Richard Branson doesn’t take risks where he can’t afford to lose. Warren Buffett doesn’t accept 99% of the investment ideas thrown his way. Steve Jobs was more proud of what Apple “didn’t” do than what the company has become known for: making great products that work excellently right out of the box.

Those were all calculated risks, not the “go-for-broke” stupid moves that usually get associated with taking on risk.

If we all avoided risk, we wouldn’t be here. We wouldn’t have this great nation to live in and to prosper with our neighbors. We have to compare the potential gain to the potential loss, and then make a decision.

So how do we minimize loss when taking risks?

First, calculate the potential gain. Probably pretty awesome or it wouldn’t be an option.

Second, calculate the potential loss. Done correctly, this is often sobering.

Third, do you have the money, time, energy to invest in the project and still be able to live if it’s a complete failure?

Where are you taking risks? Where can you afford to lose and still come out ahead?

Don’t forget the value of experience gained.