Risk and Uncertainty
We live in an unstable world, and that fact is becoming more apparent and more personal every day. By any measure—economic realities, global events, your health, job security, or relationship status, to name a few—we observe and encounter a harsh reality.
Nobody really knows what is going to happen next.
Uncertainty abounds. But, while this reality seems amplified at the moment, it has always been the case. Even with the most extensive preparation and due diligence, you will never be able to remove all doubt and claim complete certainty about an anticipated outcome. That is an undeniable fact of life.
Embrace Uncertainty
How you experience life is dependent upon your relationship to the unknown. If you are curious, expectant, and hopeful, your experience will reflect that. You will be more resourceful and in command of your response to external circumstances.
Uncertainty can be unnerving.
If, however you are fighting the flow of change at every turn, you will experience a barrage of undesirable circumstances that are happening “to you.” When we adopt the role of victim, we relinquish control of our inward and external responses to reshape events for the better.
I believe we need to embrace uncertainty and take an active role in creating a life and a world that, while still unpredictable, is positive in nature, evolving for the better, and shaped by our powerful words and actions. While you can never completely control the outcome, you can greatly influence it.
Take the Right Risks
Uncertainty is undeniable, and to navigate through it, we must accept certain risks and reject others. Largely, this is an intuitive process, but the term “risk” means that the potential downside is quantifiable. When you focus on “uncertainty,” you will be overwhelmed, because it is an ambiguous and all encompassing term. But a “risk,” by definition, is measurable and finite. You can consider a risk, compare it to the potential rewards and benefits, and make a decision about your next move.
The Ratio of Risk and Reward
Risk is relative, and it is entirely a matter of perception. One person would think nothing of free-climbing a 100-foot cliff, while another is fearful of leaving his own home. Most of us are somewhere in between. The key is to become aware of your own attitudes toward risk and to be willing to turn aversion into acceptance for a meaningful reason. When you have a meaningful reason to lean forward—when you are aligned with a persuasive purpose—discomfort transforms into excitement.
Here’s a quick risk assessment that will help you get past emotional reflexes and shift your perception. Answer these questions, relative to the choice or circumstance you are contemplating.
• What is the immediate best thing that can happen?
• What are the long-term rewards?
• What is the worst thing that can happen?
• Is the worst thing acceptable? Can I live with it?
• What is the likelihood that the worst thing will happen?
• What preparations and precautions can lessen the likelihood of the worst-case?
• How effective will they be?
• Is the reward worth the risk?
Risk Assessment Formula
Think of this as a mathematical Risk Assessment formula:
BT + R ≠ (WT – A) × (L – P)
Of course, the values for each term (as defined below) will be subjective. That’s the point. You can use this process to clarify your thinking, estimate what these aspects of risk and reward mean to you, and then arrive at a more informed and reasoned decision.
BT = Best Thing. On a scale from 1 to 50, with 1 representing a small positive outcome and 50 representing a “dream come true” scenario, how would you characterize the immediate impact of your best-case scenario?
R = Ongoing Rewards. We’re going to use this number to beef up the “best case” side of the equation. This represents the ongoing benefits you will gain into the foreseeable future. They could be tangible, monetary, and concrete. Or, perhaps the rewards are less tangible but equally significant, such as a boost to self-confidence or self-esteem. In a business case, this could also represent your market position or future potential business. Again, pick a number from 1 (very minimal long-term impact) to 50 (maximum long-range benefit).
WT = Worst Thing. This time, use a scale from 1 to 100. The number 1 indicates a non-issue and 100 means “total devastation.”
A = Acceptability. This will be an adjustment to the “worst case” side of the equation. Use a scale from 1 to 50, but with the higher number being positive: 1 means that this is not acceptable at all (it would be really hard to recover from a negative outcome) and 50 indicates that you could recover from this without much difficulty, even though it would initially have a negative impact.
L = Likelihood. This is represented as a percentage (or as a decimal) that the worst thing will happen (.10 means that there’s a 10 percent chance of it happening). Be as honest and objective as possible.
P = Precautions and Preparation. This is an adjustment to the likelihood percentage. If you were totally prepared and took the necessary precautions, by what percentage would that lower the likelihood of a negative outcome?
Notice that this equation does not have an equal sign between the two sides. It has a “does not equal” sign, because the chances of the reward and the risk being equal are miniscule at best. Instead, one side will always be greater than the other. The results will vary, of course, depending on the unique circumstances you face.
When the reward side is greater than the risk side, the best thing that could happen plus the potential long-term rewards are greater than the worst-case possibilities. Perhaps this is because the worst thing that could happen really isn’t that bad, or the likelihood of it happening is extremely low. Here, the situation really isn’t as risky as you may have first perceived it to be. Go for it!
Here are some real-world examples to help you understand how to use the risk-assessment formula.
Reward Greater than Risk Examples
First example: Getting on an airplane to travel across the country. The worst thing, in this case an airplane crash, would be horrendous. Yet the likelihood of it happening is extraordinarily small. Thus, the reward of being able to quickly get where you are going outweighs the adjusted risk.
Or maybe the worst thing is substantial, and maybe even likely. Yet there are things you can do to minimize the risk with precautions and preparation. And the potential reward is enormous—the fulfillment of a lifelong dream, for example. In this situation, you might find that the best thing and the rewards associated with it are still worth the risk.
Second example: Investing a significant amount of money and time in order to start a business. You could easily lose it all, which would have a huge initial negative impact. But in time, you could recover. The potential rewards of doing what you love and gaining enormous satisfaction and experience may make it a worthwhile and admirable endeavor. Again, acceptable risk is subjective, as is the magnitude of the successful outcome.
If the worst thing that can happen is devastating and intolerable, and it is a likely outcome, then that side of the equation will be greater than the reward side, and you should avoid the risk. It’s simply not worth it.
Risk Greater than Reward Examples
First example: Engaging in questionable activity (such as a shady business deal or creative accounting) for a potential profit or enhanced level of status or success. Even if the chance of being found out (the risk) is relatively low, the potential devastation would ruin your career and your reputation. Also, the fact that the potential reward would come at the cost of your principles would greatly diminish its worth. This isn’t an appropriate way to “make yourself uncomfortable.”
Second example: Riding your bicycle off the garage roof in order to make an audition tape for the next “Jackass” movie. (Any action that starts with the words “Hey, watch this!” probably falls into this category.)
If you were to run the numbers of such a stunt, it might look like this:
BT = 4 (a small shot at fame and a chance to embarrass yourself nationally)
R = 2 (long-term reward: “Hey . . . aren’t you that idiot who was in that movie?”)
WT = 98 (broken bones, paralysis, or other serious injury
A = 10 (You would likely recover but have some lingering pains and the footage to prove it.)
L = 60% (of serious injury)
P = 10% (Helmets, pads, and a positive attitude can help only so much.)
Best-case equation: 4 + 2 = 6
Worst-case equation: (98 – 10) × (.60 – .10) = 44
6 < 44
Analysis: Keep your feet on the ground, pal. Don’t you wish all of life’s decisions were as easy?
Into Action
1. Embrace uncertainty as an undeniable, exciting opportunity-rich reality.
2. Determine what you truly want and how you desire to grow.
3. Use the risk assessment questions to fully understand the measure of your uncertain next steps.
4. Measure the risk against the potential rewards, factoring in the best and worse cases, and the likelihood of potential outcomes.
5. Take the risks that are right for you, and take an active role in shaping your future.
You can never eliminate the risks of life. Besides, where is the fun in that? You can, however, better understand the risks before you and decide to accept or reject them for the right reasons. Instead of feeling overwhelmed by uncertainty, become empowered by the possibilities that await you!
With encouragement always,
Dan
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This just came at the right moment for me. Many things are happening and this for sure provided enlightenment. Thank you.
Hi Dan: This one is extremely relevant to us at Roche right now. Thanks so much for sharing your wisdom!
You fellow juggler…keep on lookin up!
dee
Thank you! This came just in time as I am setting my goals to quit my full time job and fully run my own business. The article was Karma for me, giving me a formula to figure things out!
Keep moving forward!
Jackie
The only way to not make a mistake is to do nothing at all. What a waste of a life and so many missed opportunities. Once again your wisdom and message are so meaningful.
Thank you,
Carol
This gives hope for the future as we move through uncertainty, as well as a way to plan next moves. Thanx dan