In part three of the series on The Rationality of Risk, Chris Surdak gives some guidance on making friends with risk. Loss, failure and disappointment are a fundamental part of risk, and they are the part that most of us don’t particularly care for. But, if you aren’t facing the real possibility of negative outcomes, are you really taking any risk at all? And further, if you never take real risks, what is the likelihood that you will generate anything of real value?
In this third installment I’d like to address why certain leaders are willing and able to take risks even after a history of losses. I’ll address why we celebrate these ‘heroes’ even as most of us would not make the same decisions as they did. And finally I’ll provide some guidance for those who may be interested in embracing risk as part of their approach to business in order to start their own ‘hero’s journey’.
We Have Met the Enemy, and He is Us
The vast majority of business people I interact with hold a healthy fear of risk; indeed they expend enormous amounts of time, energy and money attempting to avoid it. As I pointed out in my earlier installments, western business people have been trained to believe that risk is the enemy of commerce, and that businesses should be able to produce profits without taking risks. In effect this is a belief in, and expectation of, free money. This sounds good in fairy tales and governmental budget meetings, but it rarely survives the harsh realities of the marketplace.
As I mentioned in part 1 of this series, riskless rewards are possible only when we are taking advantage of new resources in new ways. Humanity has followed a strategy of Discover, Infiltrate, Exploit (DIE) for much of our history, and this is the basis of much of our success as a species. Early in the DIE process it is possible to make gains with little risk. However, as we fully exploit a new resource, the low-hanging fruit vanishes quickly, and we must climb to higher, riskier branches in order to continue to eat.
The Necessity of Failure
Some of the most successful people in history achieved success only after experiencing extremely large doses of failure. These people tried something new, something big, something bold, and something risky, but their efforts were met with the ugly side of risk, rather than the beautiful side that we universally celebrate. For most people such failures strengthen their avoidance of risk; eminently rational and Pavlovian. When an action is met with a negative response the brains in most of us are hardwired to tell us, “Don’t do that again.”
Fortunately there is a small portion of our population whose brains are wired differently. These people are willing to accept risk and loss again and again, without surrendering their vision and without taking an easier path. Something in them makes them continue to strive for the rewards they see beyond all of the negative stimuli, and they continue to fight through the urge to just give in.
If all of us were wired like this we’d soon be finished as a species. After all, avoidance of risk is a survival instinct. But, when a small proportion of a population is willing to take larger risks, absorb the costs associated with occasional loss, LEARN from these experiences and persevere in taking wise risks, the population as a whole benefits greatly.
Some people are successful without going through this sort of Darwinian selection process, but I’d argue that such people are lucky, rather than good. This leads to the old saying, “I’d rather be lucky than good.” I beg to differ. The problem with luck is that it is a fickle bedfellow, one that may leave you at any time. Statistically-speaking, it is certain to do so. Luck is for the young and the foolish.
Taking risks, accepting loss, and rising again to the challenge is the stuff of legends. As a species we celebrate those who survive this process, because we know that most of us can’t and won’t. From Odysseus to King Arthur, from Rostam to Beowulf, we idolise those who take the hero’s journey and win in the end; if only because we’re not sure we could do so ourselves.
Modern Day Heroes
There is no shortage of such people in more recent history. These are people who have taken great risks in their lives, failed, and nevertheless were successful in the end. We celebrate them, perhaps because we only acknowledge the benefits of their successes, and ignore the pains they went through to achieve them. Examples of these people include:
Steve Jobs, father of such dramatic failures as the Newton, NeXT Computer and Macintosh TV.
George Washington, who lost nearly every battle he fought in the first half of the American Revolutionary War, and in the first 44 years of his life.
Albert Einstein, was a washed up physicist who became a patent clerk in order to pay his bills, right before he intuited General Relativity.
Winston Churchill, whose hubris led to the horrible losses at Gallipoli in World War I and whose humility and resolve led to Britain’s eventual victory in World War II.
Thomas Edison, who tried thousands of different elements for his incandescent light before finally finding one that worked.
J.K. Rowling, who went from being penniless and on welfare to being one of the richest women in the world in less than a decade.
Stephen King, whose first book was rejected by 30 different publishers before launching his writing career (something I can well relate to).
The list goes on and on. Naturally, for each person who succeeds there are hundreds or thousands who did not, which is why they remain unknown to us. But, when someone risks mightily, faces great loss, perseveres and eventually wins, that’s the stuff that moves us all.
It is these innovators, these risk takers, who find new worlds for us to conquer through DIE. These people are the discoverers of new frontiers. They lead us into undiscovered countries so that we may infiltrate them, and they show us how to exploit them to the benefit of us all. Somehow they are able to see through short-term, near-field risk, see the world how it could be, rather than how it is, and boldly lead us there. They survive the losses that are necessarily part of any meaningful risk, they learn from them, and they push on through in order to eventually receive their just rewards.
We idolise these people, and rightfully so. They are a small minority of the human population that creates vastly disproportionate value for the rest of us. There is perhaps only one in tens of thousands of us who willingly accepts such risks, and only one in tens of thousands of those few who actually succeed in the end. But thankfully, this tiny fraction of our population keeps our civilisation growing, our lives more safe and secure, and our world less risky for the rest of us.
A Recipe for Leveraging Risk
If you have bought into the notion that nothing great comes without accepting great risk, you may then be compelled to ask, “How do I do this myself?” I’m no scholar on the topic, although I too have had my share of epic failures in my career (two failed startups in my past, along with a prior failed attempt at publishing a book). But, if you analyse these people and look at their life stories several common themes present themselves. Though not comprehensive, I think the following elements are key factors in successful risk taking.
1. Get Comfortable with Discomfort
First and foremost, successful risk takers are naturally uncomfortable with the status quo. For whatever reason, for these people ‘good enough’ never is. They view the world not as it is, but as it could be. Indeed, many of them view the world as it SHOULD be, and then work tirelessly to make it so.
This world view necessarily makes one look like a mal content, or at least someone not willing to play along. There are many who have power and privilege in the status quo, and they’re not likely to suffer those who seek to change the world around them. If you want to be a wise risk-taker and make game-changing breakthroughs, a sure sign of success is that many around you don’t like what you’re doing because you’re making them uncomfortable. To succeed at this change thing you need to be comfortable with discomfort; yours and others alike.
One of the best descriptions I have come across to describe process is imagining that you’re on a roller coaster. As you go through the ride you experience all manner of stimuli that are designed to scare you. For some of us the ride is terrifying. For others, it’s invigorating. The stimuli is the same, it’s the response that’s different. If you can wire yourself to be motivated by risk you’re much more likely to achieve great results in the end.
2. Lead the Choir
As with any characteristic in a population, tolerance for and comfort with risk follows a normal distribution curve. Some of us are terrified of taking risks, others are empowered. By and large the majority of us are in the middle; not paralysed by fear of risk, but we certainly don’t actively seek it out either. It would seem reasonable that risk-lovers and risk-haters would not get along too well. They have completely opposite world views, and have completely different motivations when faced with the risk of loss; one to fight, the other to flight. Most of us are somewhere in the middle.
Successful risk takers recognise that they are at the far end of this continuum, and that there are many other perspectives around them. Like a choir, some will sing the high parts, others the low parts, many others will be in the middle. The ability to harmonise these different views behind a course of action for all seems to be a key to success.
It would be easy for those open to taking risks to dismiss those who advise against it. But, those whom we admire for succeeding after failure seem to understand that there is value in those who would run from a fight. You will never convince these people to be comfortable with taking a risk, yet they are likely pointing out potential costs associated with risk taking that the risk-lover would not consider. Further, risk takers who are able to articulate their vision to the majority in the middle are able to lend weight to their efforts, and become the compelling heroes that the rest of us are willing to follow.
So, successful risk takers have a vision of the world beyond the risk, articulate that vision to those of us who are hedging our bets, and listen to yet neutralise the voices of those who are naturally risk adverse.
3. Be Risky, Not Reckless
While it is not always obvious, there is a significant difference between risky and reckless. Risky means taking an action where the potential for loss is met or outweighed by the potential for gain. Reckless is simply ignoring risk and acting without concern for potential gain. Obviously, we want to take our heroes’ journey without being reckless, but how do we do this? Mostly, it’s about awareness. You must characterise both what you stand to lose by taking the risk and what the potential reward may be. Only then can you take reasonable rather than reckless risks.
Note that this doesn’t mean you need to know exactly what the rewards will be if you succeed. Rather, you need to know that whatever is on the other side of your risk taking is likely to be worth the potential costs. When you’re in the Discover or Infiltrate stages of the human DIE process it may be difficult to characterise exactly what a better world may look like. However, it should be reasonable to determine how much risk to accept against the potential rewards.
When I was in elementary school I was taught that when queen Isabella of Spain decided to bankroll Christopher Columbus’ voyage to the Americas, she took an enormous personal risk. Certainly, hiring three sailing ships, hundreds of crewmen and half-a-year’s provisions represented a substantial investment. And three or four decades ago we were taught that Isabella had no way of knowing if Columbus was right about a westward route to China.
Decades later, we now believe that the reality of this story is very different. There now appears to be substantial evidence that by the late 15th century China had already mapped much of the new world and had shared this knowledge with Western leaders (like the papacy and the royal courts of Europe). Isabella wasn’t taking a gamble that Columbus’ expedition was going to sail off the edge of the world. She was taking a calculated risk that the Chinese maps she had heard of were genuine, and that a whole new world was waiting to be conquered, rather than discovered. The distinction may be subtle, but so too is that between risky and reckless.
4. Invest in the Boundaries
Within the human DIE process, the greatest chance for game-changing rewards is moving between the phases. There is much to be gained in Discovery, but the risks are rather high. It is not uncommon for those who discover new lands, new ideas or new technologies not to benefit themselves from their discoveries. At the other end are those who try to further the Exploit phase, but they do so against diminishing returns and falling margins.
The real opportunity for making huge returns on risk comes from moving from Discover to Infiltrate, or from Infiltrate to Exploit. Christopher Columbus didn’t discover the New World, he started its infiltration by Europe. There is still controversy over whether Edison was the first to invent the light bulb, but he was certainly the first to infiltrate the market and make money on it. And captains of industry from the 1800’s didn’t discover the processes for mass production of steel, they didn’t discover petroleum, and they didn’t invent the railroad or steam power. But, what they did was infiltrate the global market for these technologies, and then exploited their use in order to make themselves wealthy.
So, the message here is not to go and re-invent the Internet; we still don’t know who did so, although we’re fairly certain it wasn’t American politician, Al Gore. Rather, the goal should be figuring out how to infiltrate the use of something like the Internet into the marketplace (think Cisco, Google, IBM, etc.) or how to exploit a resource like the Internet to create entirely new value (Facebook, Twitter, Alibaba, etc.)
5. Aim Small, Miss Small
Another lesson learned from these heroes is that risk can be better managed when managed in small amounts. In Homer’s Odyssey, it took Odysseus ten years to return home after the Trojan War. While he held to his eventual goal of reaching Ithaca and his wife, along the way he dealt with all manner of risks in a just-in-time manner. It’s great to know that you eventually want to get home, but to get there you better be able to defeat the one-eyed Cyclops that’s about to eat you right now.
I was a spacecraft systems engineer early in my career, working on a number of satellites and spacecraft. Spaceflight is an extremely risky business where billions of euros and many lives are at stake. While astronauts are perceived to be risk-taking mavericks, rocket scientists are emphatically risk-averse. We used the phrase “frequent, fast failure” to explain our approach to risk management. Whenever we were doing something new we tried to break down the unknowns as much as possible, and test those unknowns in order to retire risk early, cheaply and in small ways.
This is nothing new, and we see it all around us these days in rapid prototyping, pilots, proofs of concept, etc. When trying something risky, it is best to take the risk and its attending losses in small amounts, so that each loss is not fatal. If you learn as you go, as Edison and others did, you can actually resolve to the end goal you seek faster, cheaper, better and with less risk along the way.
6. Risk Big With Conviction
By the same token, sometimes we can’t break down a big risk into a series of smaller ones. Sometimes, the world that visionaries see on the other side of a risk requires a big gamble, a leap of faith. When this is the case, the WORST thing that you can do is take a half-measure. In America we have the popular term of being “all-in,” from the game of poker. No one talks of being “half-in,” because half-in isn’t compelling. Half-in isn’t motivating. Half-in isn’t heroic. When Cortez landed on the New World he had the goal of conquering it for Spain. To ensure that he succeeded, he burned his ships, and stranded himself, and his men, on enemy ground. That certainly qualifies as “all-in.”
More modernly, Elon Musk, billionaire entrepreneur and founder of Tesla Motors and Space X, faced a similar choice, and made a similar decision. In 2010, as Musk was trying to build Tesla Motors into something greater than a niche car boutique he literally ran out of cash. Legend has it that he made an “all-in” bet, including all of his assets, to keep Tesla afloat. Musk’s risk seemed to have panned out, as Tesla’s market cap in early 2016 exceeds $28 billion.
When choosing to take an epic risk, act like it. Frankly, the odds are against you; that’s why we call it taking a risk. But, when you do take such a risk, and go “all-in,” it is likely that you’ll gain the support of others, and tip the odds more in your favour. Most of us feel compelled when we see a hero struggling against the odds to achieve some unlikely result; it is the stuff of countless books, movies, TV shows and video games. Most of us are wired to avoid risks, unless we are led to and through them. When a leader appears to show us the way many of us not only follow, we rise to the occasion and achieve our own hero’s victory. What is impossible for few, becomes probable with many, and becomes inevitable with all. That is how you turn risk in your favour.
The End of the Road of Risk?
I was compelled to write this series of articles after literally hundreds of meetings with thousands of business and political leaders over the past two years. These people were struggling to meet expectations of riskless rewards, at a time when many industries are at their end of their DIE lifecycle.
Traditional, capital-intensive, bureaucratic organisations are being completely outmaneuvered by newer, smaller, nimbler organisations that not only play by different rules, they’re playing entirely different games. New companies are using the Digital Trinity of Mobility, Social Media and Advanced Analytics to remove barriers to entry and cause massive disruption throughout our society. The equations of risk, and their input factors, have completely changed for most organisations at a time when most business people have been trained to avoid risk at almost any cost?
While humanity has managed to maintain the illusion of riskless rewards for a very long time, it is and always was just an illusion. Many of the costs that we’ve deferred along the way are now coming due, and making those payments will challenge our entire society. If we manage to get ourselves out of this fix one thing is certain. As Einstein famously quoted, “We cannot solve today’s problems with the same thinking that created them.”
We need new ideas, new technologies, new frontiers and new thinking in order to reinvigorate humanity’s DIE process, and that necessarily means taking new risks. As the Digital Trinity continues to drive change throughout our world, risk avoidance is starting to look like the reckless path. Conversely, a measured approach to taking intelligent risks becomes the path to success.
About the Author
Christopher Surdak is an Engineer, Juris Doctor, Strategist, Tech Evangelist, 2015 Benjamin Franklin Innovator of the Year, and Honored Consultant to the FutureTrek Community, Beijing, China. He has recently accepted a new position as the Vice President of Data Analytics for Oracle Corporation. He is also the author of Data Crush: How the Information Tidal Wave is Driving New Business Opportunities, which is GetAbstract’s International Book of the Year for 2014.