To Risk or Not to Risk?
Risk is one of those things that we would all love to avoid; the reality is though, without risk, there is no innovation. This week I take a look at the concept of risk, and analyse whether it is necessary to do so in a business context. I’ll look at the current situation in business based on a recent study, discuss why we are hesitant to embrace risk, and look at a case study of American investor Warren Buffett which demonstrates why calculated risk can pay off.
Risk can be encountered in a number of business areas including cash flow, innovation, employment, reputation management and increasing competition. The Oxford Dictionary defines it as ‘a situation involving exposure to danger’, or more specifically ‘a person or thing regarded as likely to turn out well or badly in a particular context or respect’. The key lesson to take away in that sentence is that it can turn out both badly and well. There is a common perception that risk equates to bad consequences, when in fact in situations where the risk is managed appropriately, positive outcomes can be achieved.
In a study discussed in The Wall Street Journal, the level of risk-taking in our society is on the decrease. The article discusses four trends which point to the fact our adversity to risk is increasing. These are: companies are adding jobs more slowly than in the past; investors are putting less money into new ventures; entrepreneurs are starting fewer businesses; and workers are less inclined to change jobs or move for new opportunities. Businesses are opting to take fewer risks, a move which the article, explains is causing businesses to keep ‘more cash on hand rather than investing new employees’.
Why are we hesitant?
Naturally, human beings are hesitant to embrace risk; if there is a chance that an idea can fail then we tend to look at the negatives rather than the positives. Holly Green highlights that ‘one reason why we are more hesitant to embrace risk is that the consequences seem more severe’. In today’s fast-paced business environment one poor decision or market miscalculation can be extremely damaging for an organisation. Another reason we are hesitant is due to the workplace culture of many organisations that do not support risk taking. When management is seen to maintain current procedures rather than exploring new ideas, then the culture is echoed throughout the organisation.
Unfortunately for the risk adverse, it is almost impossible to enter into any new initiative or progress further without encountering some sort of risk. It is important for organisations and individuals to accept that risk is inevitable, and go about their endeavours with an open mind rather than fear. In comparison to companies that do not act, those who gamble on new initiatives are certainly more likely to fail, however they are also more likely to overwhelmingly succeed. Staying buoyant in today’s market requires ongoing innovation which demands a certain level of risk. Also, organisations must understand that what made them successful in the past will not necessarily do so in the future.
Ensure risk is calculated
Whilst it is all well and good to accept risk, I am by no means encouraging you to take every opportunity that is presented to you. It is very important that risks are analysed and calculated accordingly. This includes creating contingency plans for both the good and bad consequences that could occur. Decision makers in organisations must weigh up the risks and rewards of all initiatives, and ensure they do not ignore the threats that are posed. During the process of calculating the risk, try to figure out a means of reducing the severity of a negative consequence. At the end of the day, you will not be able to plan for every contingency, however having key contingency plans in place will be critical in the event that you have any issues.
A case study
American investor Warren Buffett is known as a calculated risk taker. Coming from humble beginnings, Buffett worked his way up to being the richest person in the world in 2008 according to Forbes Magazine. One of Buffett’s more famous quotes is ‘Risk comes from not knowing what you’re doing’. The key point to take away from Buffett’s career is the fact he was a calculated risk-taker. Buffett had a different mindset in comparison to other investors; instead of looking at what could go right with an investment he did an in-depth analysis of what could go wrong. This was the first step in his investment process, he was not interested in the potential upside if he thought there was a major reason why it could fail. He was realistic in his decisions ensuring each risk was calculated and planned for.
Another lesson to take away from Buffett is that when calculating risks, don’t chase the unachievable. Buffett looks at risks like gambling, if the prize seems unbelievable, then it most likely is. Again it comes back to taking calculated risks, but you must ensure that you remain grounded throughout the research process and don’t get caught up in what could happen.
What do you think?
All in all, it is clear that to progress in business risks must be taken. However how the risks are calculated and managed will be the key to success for your organisation. I am interested to hear your views – do you take the time to calculate risks, or do you go with your ‘gut feeling’? Please feel free to comment your opinion below and join in the discussion.
This article was written by Laura Hutton on behalf of the Australian Institute of Business. All opinions are that of the writer and do not necessarily reflect the opinion of AIB. The following sources have been used to prepare this article: Wise Geek; Base Hit Investing, and NDTV.