A client of mine was recently given the opportunity to move to Italy and take over a business there.
He posed the interesting question ‘Do you have to take risks to succeed?’.
Let’s face it … everything has a risk associated. It’s just a question of how much.
It’s common to think of “risk” as binary – something is either “risky”, or it’s not.
Slightly more helpful is to think of “risk” on a scale – something is “more” risky, or less.
Better yet is to move beyond the single-dimension, and think of risk from TWO perspectives:
- How likely is it that something will go wrong? (In other words, what’s the probability of the risk happening?
- What is the severity of the consequence if it does go wrong?
Probability vs Severity
Which is more important – the likelihood of a risk occurring, or the consequence of that risk happening?
When “the worst that can happen” doesn’t really matter, then the likelihood of it happening also doesn’t matter.
So, when considering risk, get clear on the consequence … what IS “the worst that can happen”?
But what if that consequence DOES matter?
Here’s where probability comes into play. Is that “worst thing” likely?
If the answer is “unlikely enough” you can move forward, no longer paralysed with the fear of “something going wrong”.
There’s always a risk … yet when you combine BOTH these factors – the severity and probability – you make better decisions concerning risk.
An emotive example to illustrate the point is the MMR vaccination scandal.
A misleading and erroneous report put fear into new parents, suggesting the MMR vaccination was a potential cause of autism.
The LACK of rational risk-assessment has had significant downsides. How could we apply this probability v severity framework to the MMR vaccination decision?
What’s the severity of the vaccination causing autism?
VERY high. For a previously apparently healthy child to develop autism would be a life-changing event, with potentially extreme consequences.
And this is how far many parents reached in their (non)analysis.
“I’m not prepared to take that risk!” they cried.
And yet …
… what was the likelihood of such an event happening?
Here’s where a rational understanding of the data helps. Millions of children were, are and continue to receive the MMR vaccine. How many autism cases “result”?
Setting aside the fact that the cause-and-effect of MMR-autism has been debunked, the number of children reported to have developed autism was counted in units. Not thousands, not even hundreds. In units.
Millions of vaccinations … units of cases of autism.
In other words, the probability of “the worst case scenario” was miniscule.
Serious, for sure … but incredibly unlikely.
In this particular example, there was an unintended consequence from the poor risk-decision making … a rise in the number of instances of measles.
This consequence was FAR more significant for parents and their children.
Measles can be a life-threatening condition. It is not trivial. Very few would argue with the need of and benefit from vaccinating against that disease.
Yet, by not receiving the MMR vaccine, those “worried, caring” parents were creating more likely conditions for their precious child to contract measles.
High severity … AND increasing likelihood. That’s real risk, right there.
The focus ONLY on severity WITHOUT understanding the probability led to a misplaced decision, based on perceived risk.
The bottom line here is to recognise both the severity and likelihood of the “bad outcome” happening. Remembering there is always risk, these two perspectives help you navigate to better decisions.
Now, what if you decide the severity of a situation matters … and the probability is higher than you’d want? What to do then?
This the second step …
Minimising the Risk
What can you do to minimize, or at least bring down the level of risk or the probability?
Going back to the above client to illustrate the point, he is considering going to Italy to take over an existing business. If it’s already an existing business that has a reputation and a customer base, presumably the risk of taking it over is lower than the risk of starting a business from scratch.
Although it may feel like a big risk to move the family to a different country, the probability of something going wrong is likely to be quite low.
If the business is higher risk, (for example, a newer business or without a good reputation) the probability might be higher.
What’s needed then is to take the actions which will make that business more secure. By doing so he’ll reduce the likelihood of something going wrong. He’s reduced his probability risk.
Be clear on your offer. Get skilled at marketing. Understand the cashflow implications, so you know what you’re going to do if the cash gets a bit tight. All these help identify the actions which will reduce your probability risk.
The Severity of the Consequence
How big a deal is it, if something does go wrong?
Can the client come back from Italy if the decision doesn’t work out? If so, it’s clear there’s a lower severity risk. If he’s decided to burn his bridges the severity risk might be higher.
Looking at risk as a binary, one dimensional question is rarely helpful. This is where decision-paralysis lives.
In reality, recognise everything has risk. Weigh up the probability vs the severity and reduce both risks where it’s necessary and possible.
Do you have to take risks?
You can’t avoid it.
Yet by thinking a little more smartly, you can avoid paralysis and make smarter decisions … which, when put into practice, will give you a very big payback.