High returns are expected on risky investments. And, riskier jobs may command higher pay for comparable skills. But, does high risk lead to high rewards when building and growing a business?
The answer is often said to be yes. But, according to my 20+ years of research, the answer is actually no--because prudent risk, not high risk, is what drives success. High risk is excessive. So it generally leads to failure and losses, rather than the hoped for high rewards.
Prudent risk, on the other hand, is more likely to bring big payoffs. Prudent risk is a calculated risk with good chances for success. Prudent, calculated risk does involve the risk taking so necessary for reaping large rewards. Outwardly, prudent risk may even look like high risk, especially when something valuable is given up or when potential for losses is huge. But, digging deeper generally reveals that the prudent risk is supported by solid reasons to move forward expecting good results. Thus, prudent, calculated risk is vastly different from cavalier risk taking that has roll-the-dice-like characteristics often thought to produce high rewards.
Prudent, calculated risk plays an integral role in successfully building and growing a business. The road to business success entails drawing upon on past foundations, making ongoing improvements and well chosen changes, being open to innovative ideas that are good fit, and avoiding detours that are totally wrong for the business. Prudent, calculated risk is key to accomplishing this.
Yet, various factors can reinforce the misperception that high risk is the key to high reward. For one, something valuable is often given up before embarking upon the path to high reward. For example, someone may leave a good job to start a business. Or, an established company might shift money and resources toward a new line of business, taking away the availability of such investment that might be urgently needed for its existing businesses. Or, venture capitalists may require company founders to mortgage their house, so high stakes create incentive to succeed. All of these scenarios conjure up images of high risk, high reward.
Additionally, perceptions of how risks lead to high rewards can be clouded by images of legendary business titans creating huge enterprises and accumulating vast fortunes. On the surface, these titans appear to have taken tremendous risk. After all, they attempt and accomplish great feats never done before, as they reap tremendous rewards while facing the possibility of huge losses. But, a deeper look at what these titans achieved generally reveals the presence of strong reasons why the so called high risk venture had good potential despite its seemingly risky nature. Backed by these rather compelling reasons for success, the apparently risky endeavor is likely to fare well.
For example, both Ted Turner and Richard Branson are considered big risk takers who built vast business enterprises. In addition to the risks of starting new businesses, Branson's activities included risky long distance balloon trips--great for publicity, but entailing potentially life threatening dangers. Turner pursued sailing where, like Branson, he participated in risky activities outside his business. Additionally, Turner risked his successful cable TV enterprise to build CNN.
But, although there were elements of daring, closer examination of these alleged high risks reveals that they were coupled with factors that meant good potential for success. For example, Branson looks to identify and protect against the downside. And, Turner built CNN by repeating approaches that did so well in his previous successes.
This tends to be the case whenever building a business brings tremendous rewards. For the biggest successes, prudent risk generally prevails. Good results are relatively likely because--despite ostensible innovativeness and novelty--the endeavor was based heavily upon success spawning factors such as using past strengths, repeated approaches, and/or careful planning for any downside.
Thus, whenever vast business enterprises are built, apparent high risk is often notoriously visible, leading to a distorted perceived importance of its role in generating high rewards. Since the presence of factors that tone down the allegedly big risks may not be as obvious, it is easy to misperceive the level of risk. So, risk that is actually prudent is frequently viewed as high.
These kinds of distorted perceptions encourage businesses to invoke high risk, high reward and make radical, risky moves. But, rather than desired huge rewards, these moves often bring disastrous results. That's why businesses must thoroughly evaluate their plans, making sure riskiness is tempered by factors likely to fuel success--factors that reduce high risks down to prudent ones. Identifying how to accomplish this is not always easy, but recurring patterns can be a helpful guide. And, getting it right can make all the difference in the world.
La Grange Park, IL