Preface: “Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did. So throw off the bowlines, sail away from the safe harbor, catch the trade winds in your sails. Explore. Dream. Discover.” — Mark Twain
Is Risk Where the Reward Is?
Credit: Donald J. Sauder, CPA | CVA
Most people, including entrepreneurs, do not understand risk in entirety. Risk (say financial or business) is often a vague term with different connotations for many individuals. If you flip a quarter ninety-nine times, and it is heads on each, what is the probability it will be heads or tails on the next coin flip? Secondly, what if anything is at risk?
Many would like to say the world is becoming less risky – say continuous improvements in healthcare, job safety, and financial regulation. When you hear “It’s different this time,” consider that often when (business) leadership makes great decisions most don’t realize it; and the realization of a good or bad decision are often only apparent after the fact (consider the real estate decision on May 24th 1626, when Peter Minuit purchased the island of Manhattan for the equivalent of $24 worth of beads and trinkets.)
Insurance and banking are industries built on risk management. The tenure of an average Fortune 500 executive is five years, so why would a prudent CEO take risks with a longer-term payback where they will not receive the credit? What is your timetable for the rewards and payoffs of your business decision(s)? Are you effectively able to make a decision with no payoff rewards for at least three to five years?
Risk management can be painful – both to talk about and to perform. What if you’re wrong? “People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.” — Peter Drucker.
Yet events of risk are sometimes similar but always different, and common sense is an oxymoron. For instance, the risk of a tulip bulb mania such as the Dutch speculation in 1637 where one bulb at the height of the market frenzy was worth the price of an average personal Dutch residence. And so again, high returns usually are generated from high risks.
Risk is not the same as gambling. Do you intentionally avoid risk? If you avoid uncertainty in business, there should be few to no expectations of rewards. Successful business owners manage risk expertly and deliberately or otherwise. Risk aversion is not exemplified with a swashbuckling cowboy dice roller. Yet without the “range rollers” risk riding on their ATVs say, you couldn’t enjoy a beef barbecue picnic, where you manage the uncertainty in the weather from a few possible sprinkles on your guests.
Are the risks in business more or less than they were fifteen years ago? Risk involves change, industry disruption, and automation. What new changes are coming, such as tax laws, product innovations, or financial regulation? To keep up, businesses need to effectively adapt and be prepared to adjust with workable solutions.
In the early years of computers, it was said that no executive was fired for purchasing an IBM mainframe because they worked flawlessly every time – a characteristic of the excellence in IBM products. Yet some well-intentioned and educated executives were fired because they purchased computer mainframes where the implementation risks didn’t proceed according to plan (i.e., they were not IBM models) and hence the risk of the blame for a wrong decision was reality. Most individual decisions are made with the best of intentions in reason. Now, what can IBM’s Watson do?
Studying the past often provides little helpful indication of when wilderness can result in (business) disruptions in the future. Economic and financial changes, wars and civil strife have been in the equation of life since the early days of history, and today companies have data loss risks too. If your business generates high rates of return, do you understand the risks? That’s what you’re being compensated for in the marketplace.
“What you have to do, and the way you have to do it is incredibly simple. Whether you are willing to do it is another matter.” — Peter Drucker.
After the fact, when we look at the history of what’s happened, we often think we would have been smarter than “those people”, made better decisions too, and appreciated more successful outcomes from the “wildness.” Data analytics and news channels today balm our concerns that we are perhaps ignorant or misinformed about business wilderness trends, developing risks, unpredictable disruptions, and quickly are completely engrossed in and reliant on these leading-world outlets to often give an oracle sense of perception to our managing of risks and astute decisions.
Risk and uncertainty are not the same things. There is never a zero-risk decision, and every decision you make, whether in business or daily life has risks, although not always monetary. Sometimes that risk is forfeiture of the rewards from an alternative choice. Today a decision to wear the emblem of the Covid-19 era, or not to wear a mask, can result in approval or appreciation from some to opposition, arguments, or worse.
Weather forecasters are also great examples or false negative and false positives on decision risk. If there is an 80% chance of rain or even 90% of rain, we immediately assume that it is 100% probability. Or if there is a 15% chance of rain, we believe it’s a zero percent probability, and the outdoor activities of the day will be enjoyable. In most instances, naivety to appropriate risk mitigation lowers the learning opportunity to understand and manage risk effectively. If you’re a farmer or work outdoors you appreciate weather forecasters as an easy example of variables in decision risk(s); and as you gain responsibility and success in your organization it only becomes increasingly complex. The best risk managers should wisely consider and remember Ahithophel and the fact that their is more to risk management than brilliant synapses.
And so, in life and business, weighing the risk(s) in the right balance, is the grand challenge.