Risk or Ruin: Which Risks Are Worth Taking?

Fear is an emotional signal that has evolved in humans to help us avoid risk. However, distinguishing between real and perceived risk is a tricky task, as the sense of fear is triggered in response to both real and unreal risks. The fear that arises from perceived risk leads us to avoid risks that are instrumental to our long-term success in business and life. This article draws a distinction between real risk and perceived risk to help us discern whether our sense of fear is rational or irrational.

Defining Ruin (Real Risk)

Risk is the magnitude of potential loss, and fear is an emotion that prevents us from taking risks. A certain kind of risk must be avoided, which we will refer to as "ruin." It is important to distinguish between risk and ruin. For example, if you have a net worth of $100,000, it is not rational to bet all of it for a chance to win $1 billion if the odds are 1 in 20, even though the expected value of the bet is $50 million (1/20 * $1 billion). In 19 out of 20 cases, you would end up with zero net worth. Another example would be pouring your time and money into mastering and getting employment in one specific domain. If all you know is, for instance, managing a warehouse, there will come a day when robots and software will replace your job. Risks that are not worth taking will risk your survival in the game and will empty you of the chance of further tries. Risks that are worth taking, on the other hand, have limited, foreseeable downsides with high potential upsides.

Defining Risk (Perceived Risk)

Some of the risks worth taking include starting something new, creating, and forming new relationships. We often avoid meeting new people or embarking on new adventures—these are perceived risks. For example, public speaking is a common fear, even though delivering a bad speech will not ruin us. The upside, however, is immense, as people remember us for the best speech we give. A musician can take the risk of producing hundreds of works of art, and eventually one becomes a hit. Worthwhile risks allow you to fail hundreds of times and give you the chance to win big once. You can pitch your start-up idea to 100 investors and hear "No", 99 times. All you need is one "Yes". Nobody blames you for failing one hundred times at starting a business, as long as you win once. In fact, the probability of winning at least once in 100 tries given a mere 1% chance of winning is 63.4%. Here's the math:

• P(win at least once) = 1 − P(not winning in 100 tries) = 1 − 0.99^100 = 63.4%
• The probability of not winning in 100 tries is 0.99^100.
• The probability of not winning on a single try is 1 − 0.01 = 0.99.

Take Risk, Avoid Ruin

Fear is a primitive emotion that has not evolved to suit our modern environment. As Seneca wisely said, "We suffer more in imagination than in reality." We are creatures of imagination, but that same imagination can hinder us from taking action by bringing the image of ruin to the forefront of our minds. If you want to accomplish something, you must eradicate fear and start making small bets with high potential upsides. No single risk should be so great that it ruins you completely and prevents you from taking further risks. Remember, life is a long-term game, and to keep playing that game, you must survive first. Take risks, avoid ruins.