4 Assumptions About Risk You Shouldn’t Be Making

Posted on: December 21st, 2016 by bobmorris

4-assumptions
Here is an excerpt from an article written by Scott Anthony for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

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“Two roads diverged in a wood, and I—I took the one less traveled by, and that has made all the difference.” The line is instantly recognizable as the conclusion of The Road Not Taken by Robert Frost. And, the misunderstood poem helps to highlight how innovation-seeking executives need to reframe the word risk.

Most readers assume Frost’s poem is hopeful, describing the value of the rugged individualism that has long served as an American hallmark. However, a measured reading shows a wistful tone that borders on regret (“I shall be telling this with a sigh”), with critics arguing that the poem’s key message is how we rationalize bad decisions after the fact.

Similarly, when the word risk comes out of an executive’s mouth, it’s usually accompanied by one of four mistakes.

[Here are the first two.]

Assuming that taking action is the biggest risk.

In many cases, the riskiest action is in fact inaction. The pace of change in today’s world means that standing still leads to falling behind current and emerging competitors. The way in which many companies make investment decisions blinds them to this reality. Most executives know that the present value of an investment comes from projecting its cash flows and discounting those numbers into today’s dollars. The general rule is projects with positive net present values should get funded, and those with negative ones shouldn’t. That assumes, however, that the base case is zero. If doing nothing leads to decline, projects with marginal projections actually are better alternatives than inaction (this misuse of financial tools for innovation is discussed in depth in a 2008 Harvard Business Review article by Clayton Christensen, Willy Shih, and Stephen Kaufman).

Believing that good entrepreneurs seek out risk.

They don’t. Good entrepreneurs recognize the inherent risk of creating new businesses. After all, it’s well known that most new businesses fail, and that most of the ones that succeed do so in modest enough ways that the entrepreneur gets at best a modest financial return on his or her effort. As Noam Wasserman noted in The Founder’s Dilemmas, “On average, entrepreneurs earn no more by founding startups than they would have earned by investing in public equity – less, in fact, from a risk-return perspective.” What good entrepreneurs excel at isn’t taking risk, it is managing it. Working with partners, raising money from a syndicate of investors, building a team, scrappy ways to earn revenue are all examples of smart risk management.

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Here is a direct link to the complete article.

Scott Anthony (@ScottDAnthony) is the managing partner of the innovation and growth consulting firm Innosight. He is the author of The Little Black Book of Innovation and the HBR Single, Building a Growth Factory. His latest book is The First Mile: A Launch Manual for Getting Great Ideas into the Market.

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