Pi of Life : Taking Risks

Risk Culture - Contextually Defined
Risk Culture – Contextually Defined

Risk.

Everyone takes it to some extent.

“Calculated risk” makes one feel one’s taking a lesser risk.

Equity investments are higher risk than debt ones and so on.

And returns are “risk adjusted”, to be meaningful.

Managing risk is the whole purpose of a B-School student, and professor.

Reducing risk is the aim of most who go through our education system and look to get a good job.

Entrepreneurs, per popular belief, take much more than usual.

And not taking a risk is a huge risk, many believe.

But really, what matters most is your own personal appetite for risk which in turn depends on your perception of risk. That determines the course of most actions in your life – from where and how you travel, how you invest and spend, even who you marry, or don’t, and most certainly the career choices you make.

Very trivially, you do something in either of the two cases

– when you care way too much about the possible outcome to care about the consequences and costs

– when the consequences and costs are small enough that you can afford to try doing it anyway

In other words – you’ll do something when your risk adjusted reward from doing it is high enough! The outcome can again be something that is an outcome or by-product of doing it, or the lack of an outcome of not doing it.

If you’re thoroughly confused by now – that’s ok!

Very few are truly able to assess risk, and react wisely to it. Most of us claim to understand the risks of something we’re getting into but are often unwilling to accept the costs associated with the risk. Risk has a lot of glamor associated with it. In truth, very often we’re better suited to lowering the cost and consequences than going after better outcomes, but the lure of the latter blinds us.

Ask anyone who has burnt their fingers playing with futures and options without truly understanding what the instruments meant. Or embarked upon an adventure trip – a trek or a rough-it-out journey or even a good ol’ bungee jump – only to realize halfway through it wasn’t their cup of tea at all! Or quit their jobs “to startup” and gotten cold feet 6 weeks into “no paycheck”.

And it is especially true for that last bunch – entrepreneurs – for whom the ‘risk’ phase lasts a really long time! The romance of “going it alone” and “being one’s own boss” is all very nice, and the legends of the IPO cashout great to recount, but to what extent are you ready to take the hit of the opportunity cost, out of pocket spends, bottomless sinks of money that promise an uncertain return and even more critically – time spent doing this? Do those intangibles, and the “learning” matter that much to you? Then there’s the tangible losses. To what extent will a specific risk, business investment or opportunity cost set you back? Are you willing to take a wiping out of 20% of your net worth? 50%? All of it? What about the loss of 2-3 good years of earning? This is one reason starting up is considered to be a little easier when you’re younger, relatively broke and have little to lose – opportunity costs are an abstract loss, after all, and smaller in one’s younger days.

But if you understand your own risk appetite, and can follow up honestly and diligently on it, age, or your current financial situation will never be a constraint. Indeed, it can provide that crucial cushion that can enable measured, ‘calculated’ risk taking! Once you’ve built up a nest-egg, and tasted the good things life for a while already, its very liberating to manage to break free of the shackles of the regular income and try something riskier (though often, giving up on those good things in life is easier said than done!)

A good understanding of your risk appetite can also tell you the kind and level of business you can bootstrap on your own, the levels at which it can sustain you and itself (that’s part of the reason for the existence of many businesses – at least initially), the growth path you can take and the point at which you’ll need to worry about funding.

Its the same for your business risks. The risks help you clearly understand when the business is “independent” – that is it is at a stable equilibrium of its own needs, what it supports, and generates. You obviously start to ask what the next state of equilibrium is, and the growth path to it could look like. Should you get to the next one directly? Each such decision is a tradeoff representing a desired outcome versus the potential costs and consequences. In the early days of the business, both the outcomes and the consequences are very very personal as well, both emotionally as well as materially.

Understanding risk very honestly and objectively, both personal and for the business, is very very important for an entrepreneur. And the sooner you start, the clearer the answers to many a question will become as you go along.

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