Risk Management: What is your spirit animal?


The other day I watched a neighborhood cat decide to cross the road to go after a bird. It glanced up once, bunched up its hindquarters, and dashed across the street without a moment’s hesitation. Simultaneously I saw a squirrel decide to do the same, only about half-way across he saw a car coming and froze with indecision as it approached – go back, go forward, or, more likely, stay there and get hit? A dog, meanwhile, had he joined the tableau, would probably not have bothered crossing the street at all, too engrossed in the smells to be found by the side of the road.

I see an analogy to human behavior in these suburban critter antics. Crossing a road is an intrinsically risky behavior, and each animal approached it differently. The cat launched into action, seemingly with little concern for the risk to life and limb, delighting in the thrilling sprint after its quarry. The squirrel fumbled in execution because he didn’t have a contingency plan when a car appeared. The theoretical dog avoided the risk, sticking with the status quo, never knowing the delectable scents to be found on the other side.

People also have personal proclivities related to risk. Knowing your own preferences and blind spots can help you better manage risk when you encounter it. People tend to fall into one of three categories: the risk-averse, who tend to avoid risk and withdraw from risky situations; the calculated risk takers, who are willing to take risks if the benefits seem to outweigh the costs; and the risk-seekers, who actively seek risk and believe the greater the risk, the greater the return.

The edges of this continuum are the danger zones. The risk-averse stand to miss out on substantial opportunities for growth and success. Avoiding risk implies making decisions from a place of fear. When you fear failure, you lose learning opportunities and squander any chance of success. On the other hand, risk seekers stand to accrue significant costs that outweigh any realized benefits. It is not always the case that high risk leads to high reward – sometimes it just augurs a spectacular fall. Seeking risk for the thrill of it is foolhardy.

Ideally we would all be flawless calculated risk takers. But even those of us who are willing to take on risk after carefully weighing pros, cons, and probabilities need to be sure that our assumptions and analyses are accurate. The very factors that we choose to consider will vary from person to person, as will the weight we assign them. When you assess a risky situation, what looks like a considerable cost to you may be neutral to someone else; what is an acceptable cost to you may be a deal breaker for another. To gain confidence in your ability to assess risk, involve others. Learn from people who see things different or who have handled similar situations in the past.

Be as thorough in analyzing what you bring to the situation as you are in analyzing the costs and benefits. What is it you would gain if you were to succeed? What would be lost if you failed? How would success or failure impact your broader goals and aims? What down-the-line opportunities would be lost if you didn’t attempt at all? What importance do you place on growth, learning, and innovation? How would pursuing this opportunity align with your values and aspirations? How much margin do you have for sustaining a loss – what is your capacity to manage the risk, both personally and from a business standpoint? What is the impact on your reputation for failing – or for failing to try? What is the best-case scenario and the worst-case scenario?

We all like to believe we are pretty good at judging risk. No one wants to see themselves as too fearful to take a risk or too foolish to know when to pass. Most of the risk management mistakes I see happen when people fail to appreciate how their own ingrained beliefs and preferences implicitly affect their decisions. To “manage risk” one first has to understand, from a personal standpoint, what fears and longings compel or constrain our behavior, and how they are situated in the landscape of our long-term goals and desires.

“To get profit without risk, experience without danger and reward without work is as impossible as it is to live without being born.” –A.P. Gouthey