“Risk comes from not knowing what you are doing.“Risk comes from not knowing what you are doing.“

-Warren Buffet

Hello all!

This is part 3, of our series on Risk. If, for some reason, you have found this episode, but have not listened to Parts 1 &2, feel free to pause this, and go listen to those episodes, numbers 9 and 10.

In the previous Episodes, on Risk we start off with defining risk. I want to return to those definitions as we kick off this episode.

Per the Cambridge Dictionary, Our two keywords for this topic are defined as such:

• By itself, Risk is defined as the willingness- to do something although there is a chance of a bad result:
• Risk-averse on the other hand is defined as being- unwilling to take risks or wanting to avoid risks as much as possible:

• averse (adj.)
  • mid-15c., “turned away in mind or feeling, disliking, unwilling,” from Old French avers “hostile, antagonistic” and directly from Latin aversus “turned away, turned back,” past participle of avertere “to turn away,” from ab “off, away from” (see ab-) + vertere “to turn” (see versus). Originally and usually in English in the mental sense, while averted is used in a physical sense.
  • Averse applies to feeling, adverse to action: as, I was very averse to his going: an adverse vote: adverse fortune. [Century Dictionary, 1906]

I chose the opening quote of Warren Buffet because it can be, as it stands alone, looked at in two ways.

One:

“Risk comes from not knowing what you are doing.” Looked at through the lens of The Peter Principle (Episode 6) then risk is borne through incompetent people’s actions.

Two:

“Risk comes from not knowing what you are doing.” Looked at through the lens of Risk -aversion, and risk acceptance, if one enters into decision-making without looking at the scenario from multiple directions and through detailed research or experience, the detrimental risk is to be had.

So, how do we ensure we are making the correct risk decisions? First and foremost,… make decisions. We know what risk-averse folks do when it comes to making decisions. I am a big fan of the band Rush. Their 1980 album Permanent Waves included the song, Freewill. Three quick lines from that song fit this decision-making quandary:

If you choose not to decide
You still have made a choice

They go on to say:
You can choose from phantom fears…

How can we remove the paralysis of these phantom fears?

Author, public speaker, and self-improvement guru, Michael Hyatt wrote this about loss aversion and how to mitigate it on his blog post titled: “What Setting small goals is costing you”

He writes the following:

How to Beat the Hidden Danger of Loss Aversion

Why is it so hard to hail a taxi in New York City when it’s raining? That’s when you most want a cab. It’s when available drivers can rack up fare after fare without little time wasted waiting for new business. Yet it’s also the time when cabs are the most scarce.

The problem is so bad that Uber and other ride-sharing services have invented “surge pricing” for rainy weather, and some taxi companies have followed suit. If you want to get more drivers on the road you have to pay two or three times as much money, even when demand is already at its highest.

How does that make sense?

The high cost of small goals

Why do taxi drivers have to be bribed to do their jobs at a time when their earning potential is already at its greatest? And what does that have to do with your reluctance to set challenging goals as we look forward to a new year?

The key to the puzzle is something called loss aversion. Daniel Kahneman is a Nobel-winning psychologist. As he explains in his book Thinking Fast and Slow, “We are driven more strongly to avoid losses than to achieve gains.”

Taxi drivers can do extremely well when it rains. But it’s also less pleasant work because they’re driving in colder, wetter, and slightly more dangerous conditions. Rather than risk working in those conditions, most clock out as soon as they reach their minimum for the day. But by taking the quick win, they miss out on a chance to accumulate significant gains.

How does this dynamic apply to our goals? We all have a strong, inbuilt bias against loss. Kahneman explains that the “aversion to failure of not reaching the goal is much stronger than the desire to exceed it.” Because missing a big goal feels like a loss, we’re tempted to set small goals we can easily reach. And like the cab drivers, we’re also likely to slack off once we’ve reached those small goals. This means to avoid loss, we actually accomplish less.

This faulty way of thinking even applies to the best athletes.

The million-dollar hesitation

Devin Pope and Maurice Schweitzer, economists from the University of Pennsylvania, studied top golfers, including Tiger Woods in his prime. They found that these fierce competitors would strike much more accurately to avoid going one over par than to come one under. In golf parlance, they feared the bogey more than they wanted the birdy!

How much does that loss-averse approach hurting pro golfers? “If in his best years, Tiger Woods had managed to putt as well for birdies as he did for par,” says Kahneman, “his average tournament score would have improved by one stroke and his earnings by almost $1 million per season.”

When setting and pursuing goals yourself, think of this $1 million difference. And remember that the difference was all in Woods’s head. Now, how much is loss aversion costing you?

Beating loss-aversion

Setting small, unchallenging goals is one of the blunders I see all the time in both my personal coaching and in contemporary goal-achievement research. I call it “sailing too close to shore.” We tend to set small goals because we’re unaware of our own inherent fear of loss. We don’t want to risk much. But there’s a direct correlation between low risk and low achievement. The greatest achievements are waiting on the other side of discomfort.

Ferdinand Magellan would never have sailed around the globe if he wasn’t willing to venture into the unknown. But without the challenge would he have sailed far at all? The research shows when we set easy-to-achieve goals, we often lose interest or motivation. Play it too safe, and we usually just stop playing.

There is significant advantages to challenging yourself with a goal you have to stretch for. If you get out of your comfort zone and embrace some discomfort, it enables you to grow, not only yourself, but your business, and your opportunities.

Don’t ignore real downsides or attempt things that are downright delusional for the sake of Risk-acceptance. But do not give an unreasonable fear of losing enough weight to prevent you from taking your life to the next level.

How to Encourage Risk Acceptance 

How does risk acceptance help your teams? Easy, Employees will be happier, innovation will be brisker, growth a much surer event, and opportunities and perspectives gained.

Here are three ways to encourage risk acceptance amongst your teams.

Celebrate Failure 

Mike Dushane, CEO of Octane says that when it fails, it celebrates. Why? “If we don’t, then we’re telling teams that failure is unacceptable and that risk is unacceptable,” Dushane said. Teams pursuing risky endeavors could well become discouraged and think that their efforts aren’t worth. Examining and learning from failures, plus applying successes (not every failure is a complete disaster) to future projects helps keep teams happy and productive, he said. 

 Be Transparent

We must frequently talk to employees about the importance of innovation and how failure plays a role on the path to success. If you think you are talking about it too much, double up. No joke, every communication, conversation, and gathering must have the acceptance of risk included.  You must publicly set aggressive goals, ones that, due to their bigness, are bound to contain at least a threat of failure. 

High levels of transparency foster cultures of risk acceptance and innovation. Author Jim Collins speaks to the Flywheel effect on success. You have an idea,(tug on the giant flywheel) you implement it (Another tug), you fail or you get constructive feedback (another tug), you adapt (another tug) now it is really spinning! And then you succeed. This is how winning organizations work. It is not about being perfect. It is about continuous movement, get that flywheel going! 

 Watch Your Language 

Managers can spout risk-aversion language without even thinking about it. A simple word like “No,” squelches risk. Sitting in a meeting and responding to an idea pitch with numerous questions you know cannot be answered at this time in the project. Amy Spurling of Compt calls this “throwing so many monkey wrenches into (an idea) that you end up with analysis paralysis.” 

Positive language can encourage risk. For instance, Improv actors use the phrase “yes and,” which encourages an idea and prompts more thought on it. Try that in your next meeting. I dare you!

Moving from risk aversion to acceptance is risky. Get over it. Take those steps, and you’ll find yourself reaping the rewards of a powerful mantra: Nothing ventured, nothing gained. 

Nassim Talab, in his book Antifragile, tells the story of a conversation that takes place at a dinner party he attended.

Taleb found himself in a heated argument with guests about education. All attendees but two seemed concerned by bad math level scores among students in the USA — Talab was one and the other, the head of the New York City School System.

In Taleb’s mind, the risk-taking culture in the USA is more important than math levels in determining the nation’s wealth. Here is why:

Teach people all the arithmetic you want, but if they’re not willing to take ‘risks’, they won’t progress much if at all, no matter their field or domain.

Talab believes that entrepreneurial spirit, that willingness to accept risk, is what moves society forward. Those are the folks who find new discoveries, become brave figures who are willing to defy the narrative of their time, and who grow by combating stressors, win or lose. Their risk is visible, they do not intervene in others’ risk, they accept it.

Talab believes that there is relatively little people need to know objectively. apart from these higher-level concepts about the nature of… well… nature.

Domain-specific and job-specific learning (remember Episode 5: Career Capitol?) can come when engaged in the chosen discipline, and when taking risks therein.

I think we have discussed the basic points of Risk-Acceptance. I can guarantee you we will be talking about this a whole lot more in future episodes.  Join us next week as we continue diving deeper into ideas and observations and topics that are pertinent within businesses and organizations today.

Links to resources are in the show notes and on the “Links Page” on my website, Eddiekillian.com

Join me next Tuesday as we continue to travel the path of what is difficult, perilous, and uncertain as we explore introducing A New Order of Things.

I am your host, Eddie Killian. And this concludes Episode Eleven.

References

Bertagnoli, L. (2022, July 12). Risk Averse? You Might Be Doing More Harm Than Good. Retrieved from Builtin.com: https://builtin.com/career-development/risk-averse

Cambridge Dictionary. (2022, January 25). Risk. Retrieved from Cambridge Dictionary: https://dictionary.cambridge.org/us/dictionary/english/risk

Hyatt, M. (n.d.). Leadership- What Setting Small Goals is Costing YOu. Retrieved from fullfocusplanner.com: https://fullfocusplanner.com/loss-aversion/

Kaufman, J. (2010). The Personal MBA: Master the Art of Business. London: Penguin Books.

Koller, T., Lovallo, D., & Williams, Z. (2012). How Risk Aversion Can Hurt Your Organization. ERM Initiative.

Lovallo, D., Koller, T., Uhlaner, R., & Kahneman, D. (2020, March-April). Your Company Is Too Risk-Averse. Retrieved from HBR.org: https://hbr.org/2020/03/your-company-is-too-risk-averse

Taleb, N. N. (2012). Antifragile. New York: Random House.