Intelligent Risk Taking

January 18th, 2006 by Steve Pavlina

Risk taking is an integral part of business and life, but so few people know how to manage it properly.  The word risk has a slightly negative connotation to it — it implies danger, tension, and possible loss.  But risk also has a positive side, the chance of hitting a big win, of getting more on the back side than you invest on the front side.

All risks are not equal, however.  Some risks are just plain dumb, and you should never take them.  But even in those cases, there’s usually some emotional benefit.  My city of Las Vegas thrives on such benefits.  I don’t even have to pay state taxes because the 30+ million tourists who come here each year pay them for me (Nevada has no state tax).  In fact, I got a $75 refund last year for taxes I never paid because the state had a $300 million surplus.  I actually got paid by the state just for living here.  Gamblers provide about half the state’s revenue.  All those risk takers help pay our bills.  I rather like that.

But what about intelligent risks?  Those are obviously the ones where the upside outweighs the downside, at least probability-wise.  You won’t find too many of those risks in casinos.

Now we all know it’s generally a bad idea to take dumb risks, where your expected outcome is negative and the potential upside is very limited.  But guess what…  It’s equally stupid to pass up an intelligent risk, where your expected outcome is positive and the potential downside is very limited.

This is a concept I learned from Jay Abraham.  I had to hear it many times before it really sunk in, but when it finally did sink in, it completely transformed my thinking about risk taking.

The most intelligent risks are those where the potential downside is limited, but the potential upside is virtually unlimited.  Those are the risks you should jump to take.

For example, consider the optimization work I do on this web site.  Suppose I take an hour to review my stats and make some tweaks to the ad layout.  There’s a risk that my income could go down because I’ve made a mistake.  But if it’s a big mistake, I’ll catch it within a matter of days (perhaps hours) and correct it.  I can always restore the layout to its previous “good” state, so any decline is temporary.  If it’s a small mistake, I may not catch it until I review the stats again a month later.  But I’ll still detect and correct the problem, and if the problem is too small to detect, its effect on the results is negligible anyway.

My worst-case downside risk for optimization work is that I’ll waste about an hour of my time, I’ll lose a little bit of money, and I’ll learn something new.

But what’s the best case outcome?  The best case is huge.  I might stumble upon a new layout that permanently boosts income.  And in that case my only investment was an hour of my time.

And the actual result of doing optimization work over the past year is that this year, it’s going to amount to tens of thousands of extra dollars vs. if I’d never done any testing and tweaking at all.  In the long run, what I’ve done already will produce enough gain to pay for my house.  And in total it was maybe 20 hours of work over the course of a year.  But what if I’d never risked those 20 hours and the possibility that I might temporarily mess up my income?  Methinks 20 hours for a house is a pretty good deal.  The house is probably worth about $350K today.

This is the kind of risk I’d be a fool not to take.  The downside is limited and fixed, but the potential upside is wide open.  What kind of total and complete idiot would I have to be not to be willing to trade 20 hours of my time for a house?

This planet has enough total and complete idiots.  Please don’t be one of them.  You will lose a lot more by missing big opportunities like this than you ever will from making mistakes.

Here are some other examples of intelligent risk taking:

  • Ask someone out on a date (worst case downside = one-time embarrassing rejection, best case upside = lifelong relationship with your soulmate)
  • Ask for a raise or promotion (worst case downside = boss says no, best case upside = permanent raise or promotion)
  • Start a blog (worst case downside = waste some of your time, best case upside = change your life and the world for the better)
  • Join a new club (worst case downside = waste some of your time and quit, best case upside = lifelong friendships plus a lot of other benefits)
  • Take a cooking class (worst case downside = waste a little time and money, best case upside = become a permanently better chef)

Are you one of those people that mentally catastrophized my worst case downsides?  Like instead of a “one-time embarrassing rejection” for a date request, you thought about a stalker or a painful divorce?  If so, maybe it’s time to turn off the TV and hang out with more positive people.

Most of us are pretty good at avoiding dumb risks, unless you happen to be reading this from a jail cell.  But we’re exceptionally lousy at taking intelligent risks.  The stupidest mistakes we make are errors of omission.

One of the reasons I’m so gung ho about personal development is that I see such pursuits as a very intelligent risk-taking.  I might waste a lot of time reading bad books, listening to lousy audio programs, and going to lame seminars, but every once in a while, I hit a huge breakthrough that leaves me permanently changed.  Most of the books, audio programs, and seminars I devour are indeed a waste of time.  Maybe I get a temporary rah rah boost from them, but usually they’re forgotten soon afterwards.  However, those few gems that help me create permanent change make the entire pursuit worthwhile.  These gems, however, are different for everyone.  One person’s lump of coal is another person’s diamond.  So even personal recommendations don’t help that much.  It’s like a game of chance, but in the long run, the odds of success are in your favor.  This machine has a long-term payout greater than 100%.

The key to intelligent risk-taking is to look far enough ahead.  When thinking about personal growth, I don’t just think a year ahead or five years ahead.  I think across the span of my whole lifetime (sometimes even thinking beyond the grave… seriously).  I ask myself, “What difference might this make over the span of the next several decades?”  Over that timespan even small changes you might make today can create huge long-term payoffs.  And the decision to do nothing today means you’re automatically denying yourself any long-term benefits.  Doing nothing isn’t neutral.  Doing nothing is way, way negative.

This is one of the reasons it’s so important to install good habits.  In the short-term, it’s a struggle, often a painful one.  We have to deal with disappointment again and again.  We fall flat on our faces, dust ourselves off, and throw ourselves into the ring anew, only to be pummeled once again.  And we use that same tired mantra, “This time it will be different!” — a mantra that fails 19 times out of 20.

What keeps me from getting discouraged when my failures outnumber my successes is to keep thinking long-term.  I often must endure a lot of failures to hit the next big breakthrough.  So I just plow through those failures as fast as possible.  It’s like a conveyor belt — there’s a new success on that belt somewhere ahead, and the faster the belt moves, the sooner it will arrive.

It’s amazing how much long-term difference just a small change you make today can make.  Just a little more self-discipline, a little more courage, a little more persistence, a little more enthusiasm — these can produce huge gains in the long run.

Take a look at the second graph from yesterday’s blog post on my 2005 traffic and Adsense revenue growth.  That was my income from this web site.  Notice how flat it is during the first four months.  This is the point where most people give up.  Personal growth is often flat in the beginning.  The gains are there, but they’re just too small to see.

Do NOT give up during the flat period!

The flat period is the hardest because you’re working hard and getting very little to show for it.  Maybe you keep working on your social skills but can’t seem to get a date to save your life.  Maybe you keep working on your internet skills but still can’t figure out how to make your own web site.  Maybe you start a new business and just can’t seem to get anything going.

That’s life.  Give yourself permission to work hard and have little to show for it, as long as you intelligently hold a positive long-term outlook.

I’ve been working hard on this business for 15–1/2 months now, but it still generates less income for me than what I could get if I went out and got a job working as a computer programmer.  There’ve been a lot of people in my life who didn’t understand my long-term thinking.  I’m sure many of my decisions look really dumb if you only project a month or a year ahead.  I’ve seen more than one person write about me, “Steve is either really smart or really dumb.”  The reality is simply that I have a very long time perspective.  Later this year I’ll be doing some things that I guarantee will look incredibly stupid from a traditional business perspective, but when I consider what those seeds will likely produce over the next several decades, the outlook is simply amazing.

I have to deal with the same negative criticism and lack of support that everyone else does.  It amuses me that one of my extended family members still wanted me to go out and get a job last year, since she felt it would make me more money in the short term.  I basically write her off as clueless — it’s not hard to do this when I look at her lifelong results from pursuing the strategy of short-term thinking and fear of risk taking.

Short-term thinking and risk aversion dominate this planet.  A person like me who embraces intelligent risk and thinks decades ahead doesn’t fit in very well here.  That was a bit of a problem for me when I was younger, but now I just embrace it.  It’s simply who I am.  I get all the support I need from my connection to my purpose and from feeling a sense that I’m working to serve the highest good of all.  The whole world could turn against me, and it wouldn’t make me want to give up.  It would probably just inflame me more.  I never get discouraged because I believe my approach to life will produce some amazing results in the long run.  It’s only a matter of time.

Love is more powerful than fear.  I overcome fear of risk by tapping ever more deeply into what I love most.  The thought of taking a risk produces excitement instead of anxiety.

Find an intelligent risk you can take today.  Most likely it won’t pan out.  But what if it does?  Celebrate either way because no matter what the outcome, you’ll gain courage just by making the attempt.


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