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Assessing And Managing Risk

Provided by Kim Gaxiola

 

“Evaluating risk always gets me fired up, I can’t help it, it’s the geek in me! I’m constantly evaluating risk and the probability of negative risks occurring as a financial planner. Sometimes, it crosses over to my personal life when I evaluate the financial risk I’ve taken as a business owner. When I first saw this article by Reid Hoffman, it immediately peaked my curiosity. It’s a must read for those of you evaluating your career and where you want to go with it. Sometimes fear and risk hold us back. I hope this article will help you take another look at risk and put it into perspective as it pertains to your career, and the other areas of your life. The concepts of risk defined here are transferable. Nice article Reid!” – Kim Gaxiola

Risk tends to get a bad rap. We associate it with things like losing money in the stock market, or riding a motorcycle without a helmet. But risk isn’t the enemy–it’s a permanent part of life. In fact, being proactively intelligent about risk is a prerequisite for seizing breakout opportunities. Many more people would enjoy breakout opportunities if it were only a matter of tapping networks, courting serendipity, and being resourceful. The reality is that doing those things is usually necessary but rarely enough. There’s competition for good opportunities. And because of that, if you can intelligently take on risk, you will find opportunities others miss. Where others see a red light, you’ll see green.

“Risk” in a career context is the downside consequences from a given action or decision, and the likelihood that the downside actually occurs. Risky situations, then, are those in which the risk level crosses a threshold. For example, flying on a commercial airplane of a major airline is not risky because while the downside scenario of a crash is painful, the likelihood of a crash is extremely low. Meanwhile, the reward of rapid transit is significant. There’s risk when you get on a plane, but it’s so low that commercial flights are not risky.

Risk is the flip side of every opportunity and career move. “[I]f you are not genuinely pained by the risk involved in your strategic choices, it’s not much of a strategy,” says Reed Hastings of Netflix. This is as true for careers as it is for business. If you don’t have to seriously think about the risk involved in a career opportunity, it’s probably not the breakout opportunity you’re looking for.

The constant presence of risk is why every career Plan A should be accompanied by a Plan B and Plan Z. Of course, risk isn’t confined to career-related activities. Doing anything contains risk, including things we do every day, like going for a jog in the park or living in a world where there are nuclear weapons and earthquakes. Even inaction contains risk. A sick person who chooses not to see a doctor is taking on a risk by doing nothing. Inaction is especially risky in a changing world that demands adaptation (see the American auto industry, for example).

So we are all risk takers. But we are not all equally intelligent about how we do it. Many people think you get career stability by minimizing all risk. But ironically, in a changing world, that’s one of the riskiest things you can do. Others think acknowledging downside possibilities is a sign of weakness: “Failure is not an option!” may make for a good movie line, but it’s not good when formulating strategy. Rather than avoiding risk, if you take intelligent risks, it will give you a competitive edge.

 

Assessing and Managing Risk

Learning how to accurately assess the level of risk in a situation isn’t easy, for a few reasons. First, risk is both personal and situational. What may be risky to you may not be risky to someone else. There are people for whom quitting a job before having another one lined up is unacceptably risky; for others, it’s a fine proposition. There are people who forego earning income for several months to start their own companies; others wouldn’t dream of putting themselves in a situation where they aren’t guaranteed a steady salary and benefits.

What’s more, risk is dynamic. You are changing, the competition is changing, the world is changing. What may be risky to you right now may not be a month or year or five years from now. What’s the risk of ruffling your colleagues’ feathers if you lobby aggressively for a lead role on a project? It depends on murky factors that are always in flux. If you just got a raise and upgrade to your title, for example, it’s a different calculus than if you’re new on the job. Nothing is universally risky or not risky; it’s a matter of degree and it various tremendously based on situation and personality.

Assessing risk, while always difficult, is not impossible. Entrepreneurs do it every day. But they don’t use fancy risk-analysis models like those found on Wall Street. And neither should you. There’s no mathematical formula that could possibly capture the probabilities and range of outcomes of a dynamic start-up, let alone the dynamic start-up that is your career. It’s impossible to quantify the pros and cons of every opportunity. You will have time constraints. You will have information constraints. Moreover, your intuition is riddled with cognitive biases that get in the way of rational assessment. So here are a few principles to keep in mind to help you evaluate how risky an opportunity really is, and how you manage the risk that does exist.

 

Overall, it’s probably not as risk as you think

Most people overrate risk. At our core we humans are wired to avoid risk. We evolved this way because to our ancestors, it was more costly to miss the sign of a predator (threat) than to miss the sign of food (opportunity). Neuropsychologist Rick Hanson puts it this way: “To keep our ancestors alive, Mother Nature evolved a brain that routinely tricked them into making three mistakes: overestimating threats, underestimating opportunities, and underestimating resources (for dealing with threats and fulfilling opportunities).” The result is that we’re programmed to overestimate the risk in any given situation.

Sticks get our attention a lot faster than carrots do. Psychologists call this negativity bias, and it pops up all the time in day-to-day life. One stern warning to avoid working with a person makes a stronger impression than one glowing recommendation. Anxiety about how your boss will react to an unconventional proposal will overpower feelings of optimism that he’ll be impressed by your work.

Overestimating threats and avoiding losses may be a fine strategy for achieving evolution’s cold mandate to pass our genes on to future generations. But it’s not the way to make the most of this life. To lead a big and vigorous life, you must work to overcome this negativity bias. The first step is to remind yourself that the downside of a given situation is probably not as bad, or as likely, as it seems.

 

Is the worst-case scenario tolerable or intolerable?

Of the voluminous research on risk, remarkably little of it actually analyzes how real businesspeople make real decisions in the real world. An exception is a study done by professor Zur Shapira in 1991. He asked about seven hundred high-level executives from the United States and Israel to describe how they think about risk in different scenarios. What he found likely came as a disappointment to architects of fancy decision trees. The executives surveyed didn’t calculate the mathematical expected value of various scenarios. They didn’t draft long lists of pros and cons. Instead, most simply tried to get a handle on a single yes-or-no question: Could they tolerate the outcome if the worst-case scenario happened? So the first thing you want to ask of a possible opportunity is, If the worst-case scenario happens, would I still be in the game? If the worst-case scenario is the serious tarnishing of your reputation, or loss of all your economic assets, or something otherwise career-ending, don’t accept that risk. If the worst-case scenario is getting fired, losing a little bit of time or money, or experiencing discomfort, as long as you have a solid and reliable Plan Z in place, you will still be in the game, and should be open to taking on that risk.

 

Can you change or reverse the decision midway through? Is plan B doable?

Management consulting firms frequently offer to pay for analysts to go to business school in exchange for a two-year commitment to work at the firm after graduation. Analysts who take the offer are making a four-year commitment in total: two years in school, two years at the same firm afterward. Precommitting four years of your life is riskier than career choices that allow you to pivot to Plan B if you decide something is not going well or if some other amazing opportunity came up. So when assessing a risk, if you realize you made a mistake, could you reverse your decision easily? Could you get to a Plan B or Plan Z relatively quickly? If the answer is no, the opportunity is riskier and should be approached more cautiously.

Michael Dell famously dropped out of the University of Texas to start Dell Computer. But his start-up wasn’t a sure thing at the time, so he managed the risk by hedging his bets. Instead of dropping out of college for good, he applied for a formal leave of absence so that if the company seemed to be going south, he could return to his studies with no problem. Dell took a prudent risk that preserved the option to reverse his decision and go to Plan B.

 

You’ll never be fully certain. Don’t conflate uncertainty with risk.

There will always be uncertainty about career opportunities and risks. Uncertainty is an ingredient of risk. And the more compelling and complex the opportunity, the more uncertainty tends to surround it. In all situations, you simply cannot know everything about all possible pros and cons. While you don’t want to make career moves on 0 percent information, you also don’t want to wait till you have 100 percent information—or else you’ll wait forever. Uncertainty makes people uncomfortable. But uncertainty does not automatically mean something is risky. Jetting off to vacation in Hawaii with no set itinerary introduces many uncertainties about what will transpire, but it’s not particularly risky. After all, how likely are you to have a bad time in Hawaii? When Sheryl Sandberg came to Silicon Valley from Washington, there were innumerable uncertainties. (Would California be a good place to raise a family? How would her reputation suffer if Google was a flop?) Had she treated all the unknowables associated with entering a new industry as serious risks, she would never have joined Google and would have missed out on a breakout opportunity. When it’s not clear how something will play out, many people avoid it altogether. But the biggest and best opportunities frequently are the ones with the most question marks. Don’t let uncertainty lull you into overestimating the risk.

 

Consider age and stage. What will the risks be to you in a few years?

Age and career stage affect your level of risk. Generally, the downside consequence of failure is lower the younger you are. If you make mistakes in your twenties and thirties, you have plenty of time to recover both financially and reputationally. You have parents and family to fall back on. You are less likely to have kids or a mortgage. Just as financial advisors counsel young people to invest in stocks more than bonds, it’s important to be especially aggressive accepting career risk when you are young. This is a main reason many young people start companies, travel around the world, and do other relatively “high-risk” career moves: the downside is lower. If something worthwhile will be riskier in five years than it is now, be more aggressive about taking it on now. As you age and build more assets, your risk tolerance shifts.

Adapted from my book with Ben Casnocha — learn more about risk at The Start-Up of You: Adapt to the Future, Invest in Yourself, and Transform Your Career.

Kim Gaxiola may be reached at (800) 584.3652 or kim@gaxiolafinancialgroup.com or www.techgirlfinancial.com.
TechGirl Financial is a part of Gaxiola Financial Group. Registered representative, securities offered through Cambridge Investment Research, Inc., broker-dealer, member FINRA/SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Gaxiola Financial Group are not affiliated.
Gaxiola Financial Group | 305 Vineyard Town Center #369 | Morgan Hill, CA 95037

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