Entrepreneurship is inherently risky, right?
After all, there are no guarantees in business and the stats on failure are grim.
Yet, as any investor knows, with great risk (sometimes) comes great reward.
These are opposite sides of the entrepreneurial coin.
But here’s the thing…
There’s a BIG difference between risk and uncertainty.
This distinction is crucial for aspiring entrepreneurs who want to make strategic investments when growing their business.
So, what’s the difference…
In The Signal and the Noise, famed statistician Nate Silver explains that risks can be calculated, whereas uncertainty cannot…
- Risk is like a game of poker: the rules are well-defined and the chance of success is quantifiable (i.e., measurable).
- Uncertainty, to borrow Silver’s analogy, is like an irrational fear of “monsters” lurking in the dark, where the possibilities and outcomes are undefined, unknowable, and uncontrollable.
As you can imagine, most people can navigate risky situations, while they are often paralyzed by uncertainty—after all, who really knows what might happen!?
Now, you might think you know how this applies to your business, but you’re probably wrong.
Because many times, what you think of as uncertainty (those scary things that go bump in the night) are actually just risks you haven’t fully measured and quantified (and thus haven’t psychologically prepared for) yet.
Need an example? Perfect, because I have one…
The “Risky Business” of Going into Overtime
Perhaps one of the best examples of well-quantified risk comes from the world of football.
Don’t fret, non-sports fans! I’ll keep it brief.
It’s the fourth quarter. Your team just scored a touchdown on the final play of the game as the clock runs out.
Yet the scoreboard stares you down, 20-21.
What happens next?
You have two choices:
- Kick the extra point to go into overtime, or…
- Go for the two-point conversion and put the game into the history books!
Which do you choose?
Because if you screw up the two-point conversion, it’s game over.
Angry fans and egg on your face.
Meanwhile, the average extra-point completion rate in the NFL sits around 85%, which is pretty dang close to a sure thing.
The choice to force overtime seems like the right choice, doesn’t it?
Sure, you still have to WIN with overtime—but at least you’ve got time to breathe, regroup, and put together a plan to come out ahead.
So what’s the correct choice?
Well, Nobel Prize-winning economist Richard Thaler (along with colleagues from Cornell and the University of Chicago) wanted to crunch the numbers to see which was statistically the “best” choice of action based on real-world data.
He dug through a decade of NFL games to figure it out.
Thaler’s findings were nothing short of fascinating.
He discovered that teams went for the “safe bet” of kicking an extra-point and forcing overtime a staggering 90% of the time.
However, those teams only ending up winning the game 40% of the time.
On the flip side, the measly 10% who took the road-less-traveled and went for the 2-point conversion won 50% of the time!
Now, that might not seem like much of a difference at first glace, but it actually means you’re 25% more likely to win by making the “riskier” choice—that’s HUGE!
But only 10% of teams do so because of the threat of immediate failure.
This is what Thaler calls “sudden death” aversion; players FEEL more uncertain about the outcome and thus wish to postpone any feelings of “what-if” and find more comfort in the less-safe choice.
This isn’t a conscious decision, of course, but here’s what’s especially interesting about this…
NFL players are no strangers to high-stakes decision-making; after all, the average play only last 4 seconds!
Yet the bias against going for the 2-point conversion persists, despite the increased probability of winning.
Kinda crazy, right?
This is a classic case of psychologically mismanaging risk and behaving irrationally in response to perceived uncertainty as a result.
The Big-Picture Perils of Risk Aversion
Listen: people are hard-wired to be risk-averse.
It probably dates back to the “caveman” days where daily life was fraught with danger.
But for a more contemporary example, look no further than the investing habits (or lack thereof) of Millennials.
Growing up during the “Great Recession,” they’re wary of the market where sharp declines impacted the portfolios of the older generations.
Some stats say that approximately 70% of Millennials have the bulk of their assets in cash.
Which, while maybe their fears are understandable, will come back to bite them when it’s time to retire.
Oh, and before you get too hard on “the kids these days”…
This behavior is a repeat of the generation that came of age during the Great Depression of the ’30s.
History has a way of repeating itself, after all.
And this speaks to a bigger point…
Despite decades of data showing that market returns are predictable, despite short-term peaks and valleys, people let their irrational fears over the present detrimentally impact their long-term success and security.
This is what happens when you let fear dictate your future!
Life will FORCE you to make choices, sometimes too late to have a meaningful impact on the outcome.
And just like the risks of investing in the market, maybe you find yourself feeling uncertain about any potential loss of time or money when it comes to getting your business off the ground.
If that’s the case take a moment to appreciate the biggest risk in the room…
That is, the risk of not taking a risk at all.
The Risk of Making a “Safe” Choice
Jim Carrey has a brilliant personal story to illustrate this.
During a now-famous commencement speech from 2014, Carrey spoke about his father who he was adamant could have been a great comedian, much like himself.
However, Carrey noted that his father chose not to act on his ambitions.
Rather than pursue comedy, the elder Carrey decided to become an accountant, something perceived as the “safer” career path.
Yet he ended up losing his accounting job while Carrey was a teenager, resulting in the family living out of a van and doing whatever they possibly could to make ends meet.
In other words, even a “safe bet” isn’t free from risk.
If you need a much-needed dose of inspiration, you should hear it from Carrey himself in this clip from Jim & Andy: The Great Beyond:
This begs a few bigger questions…
- What “risks” are you avoiding right now?
- Are you choosing a “certain” path that might not be so certain at all?
- Have you taken the time to quantify the potential outcomes of your current course of action?
Look, the future will always be unknown, but that doesn’t mean it’s uncertain.
We can, after all, make informed decisions about our probability of success (more on that in a moment).
So rather than allowing yourself to be paralyzed by fears and “what-ifs,” it might be time to rethink what you currently perceive as a risk.
And that actually leads us to our last point…
Not All Risks are “Risks” at All
As you’ve learned in this post, there’s an important distinction between risk and uncertainty.
And many people are guilty of conflating the two, confusing what can be managed (risks) vs. what is uncontrollable (uncertainties).
Thus, we need to reframe our psychological relationship with risk.
Because, here’s the deal…
Risk represents well-defined probabilities.
So while most people think of risk in a negative light, risk is, by definition, well-defined and calculable.
Which doesn’t sound all that “risky,” does it?
Now, let’s apply this insight to entrepreneurship…
Kinda like going for the 2-point conversion attempt, starting a business isn’t about flying blindly.
Simply by doing your homework to find a time-tested, proven business playbook means you’re setting yourself up to win.
After all, you can look to successful business models, used by people who’ve “walked the walk,” and replicate those strategies yourself.
And while you might not get the exact same results, your probability of success is far from uncertain.
In fact, you might even say it’s a “risk” that’s practically not a risk at all.
Ready to take a calculated risk with a strong probability of success?
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The bottom line is that, in today’s age, you don’t need to be pushy, obnoxious, or overly-aggressive to build a successful business!
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Elite Marketing Pro
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