How to take calculated risk to achieve success

Open risk-taking is a bad idea. But calculated risk-taking is something else again.

It’s not uncommon to hear the advice that entrepreneurs should take more calculated risks if they want to be successful. In fact, some billionaires have built their personal brands on a foundation of risk; as an example, Richard Branson often speaks of the risks he took when he was young, and he encourages up-and-comers to do the same.

How to take calculated risk to achieve success

Taking risks, in fact, can be a beneficial way to separate yourself from the pack. If the fear of failure is holding back your peers, your willingness to take a risk could give you an open, uncontested opportunity. In addition, risky decisions offer valuable lessons, regardless of whether you succeed or fail.

But does risk-taking, in general, lead to success? The answer depends on the following factors:

The importance of “calculated” risk-taking

First, it’s important to note that open risk-taking generally isn’t productive. Instead, successful entrepreneurs tend to take risks in ways that limit their potential losses. As Leonard C. Green pointed out, in Entrepreneur, “Entrepreneurs are not risk-takers. They are calculated risk takers.

“The difference between risk-takers and calculated risk-takers is the difference between failure and success,” Green said.

In other words, calculated risk-takers might not play a game of roulette, because the odds are against them, yet they might be open to playing blackjack because it’s possible in that game to tip the odds in your favor through strategic play.

Smart entrepreneurs also find ways to mitigate risks, whether that means purchasing insurance, protecting their websites from hackers or conducting a risk-assessment of theirbusinesses.

The importance of “survivorship bias”

Still, what are we to make of all the successful entrepreneurs who credit at least a portion of their success to risk? The evidence they cite often isn’t good enough to illustrate the effects of risk-taking, because we are left susceptible to survivorship bias.

Survivorship bias is best illustrated by the historical example of Abraham Wald and the question of whether to coat military planes in armor in World War II. The Allies were seeing too many planes getting shot down and wanted to coat them in armor to protect them, but could not feasibly coat the entire plane.

Some observers suggested studying the planes that returned home and ooking at their bullet patterns, then providing armor in the areas of the plane that had been most heavily shot — since these were the areas where a plane was most likely to get hit.

Wald offered a dissenting opinion. He suggested coating the areas of planes that corresponded with untouched areas on returning planes. There was no available sample for planes that had been shot down, and returning planes proved which areas of a plane could be shot without necessarily destroying the plane.

The difference between “risk” vs. “uncertainty”

We also need to consider the difference between what we conceive of as constituting “risk” versus what we describe as “uncertainty.” Both concepts describe a situation with an unknown outcome, but in the words of economist Frank Knight, “The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character.

Continued Knight: “There are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating.”

You can think of risk as a distribution of known probabilities. If you shuffle a standard deck of playing cards, you know your chances of drawing the king of hearts will be 1 in 52. The chances of drawing any heart card will be 1 in 4. You can calculate the other probabilities from there, and place bets in a way that aligns with the risk you’re taking.

Where uncertainty comes in is when you’re dealing with unknown probability distributions. Think about watching someone assemble cards randomly, from different decks, until that person has a new deck of 52 cards. There could be 52 kings of hearts in there! Or 51 standard playing cards with an extra 10 of clubs! Or anything in between, for that matter.

By this definition, successful entrepreneurs tend to be those who seek uncertainty, rather than risk. They aren’t building businesses that have a 25 percent chance of success; they’re building businesses where the chance of success is more ambiguous.

The bottom line

The bottom line here is that risk-taking does have some correlation with success, but there are too many complicating factors to say that risk-taking increases your chances of success. Survivorship bias, meanwhile, distorts our perspective on the role that risk plays in success. Furthermore, we use inconsistent terminology to describe the differences between uncertainty and risk.

So, ultimately, even the best and boldest entrepreneurs need to find ways to mitigate damage from the risks they take.

Knowing of these factors, you may find it possible to turn the risks you take into advantages, instead of liabilities.

How to take calculated risk to achieve success

Written By

Anna Johansson

Entrepreneur Leadership Network Writer

Anna Johansson is a freelance writer who specializes in social media and business development.

How to take calculated risk to achieve success

If you ever want to achieve the life you’ve always dreamed of, you’ll have to start taking positive, calculated risks. It is absolutely necessary to take chances to achieve anything great in life, however many are scared to take the initial leap.

As with any risk, there is always something at stake. In most instances, when it comes to your business, you stand to lose money, time and your reputation. Which are also the very same things you stand to gain! The benefits of taking risks will enrich your life and make your business or career much more rewarding.

One of my clients worked for the government for 15 years before deciding to start his own business. I helped him pinpoint his true passions and create a plan to profit from them. After moving to a new state, instead of searching for another civil servant position, he took his skills and experience of being an urban planner and translated them into a viable business for himself. Nervous about launching out on his own, he expressed this was the biggest risk he had ever taken and worried about where the income and clients would come from. However, after being in business for one year, he has already landed multiple contracts and generated a six-figure income. After taking the risk of quitting his job and launching his own firm, he’s much happier and experiencing life on a new level.

THE BENEFITS OF TAKING RISKS.

  1. Taking risks opens you up to new challenges and opportunities. Push yourself to learn a new skill, such as public speaking, which comes in handy as a business owner.

Taking risks empowers you to establish new limits in your mind. We all have boundaries or a comfort zone where we’d like to stay and many have misconstrued visions of what we think we deserve or are capable of accomplishing. When you take risks, you can eradicate that thinking, establish new boundaries, improve your outlook on life and your ability to achieve on high levels.

Taking risks can cause you to become more creative. When you put yourself out on a limb, with a no-excuse approach, your natural problem-solving skills kick in and you’re open to new ideas and are willing to try something new.

Taking risks can result in a positive outcome. Not every life step can be carefully planned out. You’ll never know if you can succeed unless you venture out into new territory. Is there a risk involved to do something totally new? Sure. But the reward is there too. When you give it your best shot and put all that you can into achieving the goal, you are more likely to make it happen.

Taking risks help you to clearly define what you really want. Calculated risks are taken with careful thought. Yet the fact that you are taking a risk pushes you to make things work. Surely you will first have to determine if the reward is something you really want enough to take the chance. If it is, then move ahead and don’t look back.

Taking chances requires some blind trust in most cases. Nothing is really guaranteed. However, you have to trust your instincts. Sometimes your gut is leading you down an unknown path but inside you know that something big is on the other side. Go for it, you’ll never know what all you can accomplish until you do something you’ve never done. Take the risk you’ll step into some of your biggest rewards.