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Uncertainty and Reasoned Risk

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You may not have noticed, but I took a week off. OK, maybe more. Went to the UK, rewrote my portion of a forthcoming book (I think you’ll like it). And I was just too tired to think. Been there? But I’m back.

I was browsing the books at my local Border’s shop and came across an interesting title, so I took my coffee and treated Border’s like a library. Anyway, the book (Inside the Mind of the Turtles) was written by Curtis Faith a former stock trader and he was writing about the mind of those people who make big bets every day. Interesting stuff.

uncertaintyI came across a section about managing risk and uncertainty – NOW he got my attention. His list of seven actions was nice advice and one of them (“take reasoned risks”) really caught my attention. How do you reason about uncertainty? I mean, it’s uncertain. Right? But the more I thought about it, the more I realized that instead of throwing our hands up in despair, we really do need to reason about risk during uncertain times. In fact, we need to do this more than ever.

Here are a few ways I think we might go about taking reasoned risks. I’d appreciate it if you would add to the list.

  • Think in terms of ranges instead of point estimates. (I’m a small business owner, revenue for 2010 won’t be as high as 2008, but it won’t be zero. I think it’s reasonable to assume a budget built on falling into a 60 -80% of 2008 revenue. Now I can go by some equipment rather than wait for “the recovery.”)
  • Learn from others. How are my competitors handling this uncertainty? What about companies in other industries? What about historical analogs?
  • Focus on the future, not the past. My sales in 2008 are an interesting, but historical, data point. Who will need my services in 2010? What changes will my clients be dealing with? What trends will continue and what trends cannot continue? (Side Note: It seems to me that in 2007 and 2008 the entire building and mortgage industry assumed that housing values would escalate FOREVER. Didn’t you just know that trend had to abate?)
  • Study the pressures for change affecting your industry and your customers’ industry. Which pressures might bring gentle change? Which pressures might trigger breakpoints?

By the way, I’ll tell you the other six actions if someone asks me. That way I’ll know that at least one person read this post.

Bye for now. Don’t forget to add to my list. How do you go about taking “reasoned” risks?

Date: August 20th, 2009 @ 15:31

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Categories: Prepared Mind, uncertainty

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KenNo Gravatar

in August 20th, 2009 @ 15:57

As I was reading this Bill, I was thinking, “a reasoned risk means there is a chance of being successful, but also a chance of failure.” As you contemplate a reasoned risk have you thought of an exit strategy? Nobody wants to fail, but if things turn bad what can you do to limit your losses?

All those people who bought homes with the expectation to throw some money and sweat equity and then sell the homes at a profit 3 to 6 months later, did they have an exit strategy? What if the improvements cost more than they could afford? What if the market tanked? (It did.) What if their contractors walked out after doing a horrible job?

What’s your exit strategy? Should it be included as you contemplate a risk of a new product, opportunity, employee, consultant or service?

Bill WelterNo Gravatar

in August 20th, 2009 @ 16:16

Ken,
Great addition to the list. Thanks.
By the way, this ties the fourth item on Curtis’ list — “Prepare to be wrong.”
Bill

Brad ShorrNo Gravatar

in August 21st, 2009 @ 08:02

Bill, those are some pretty good suggestions. How does this sound as an addition -

Develop contingency plans.

I was having a conversation with a client and this came up. The company was debating whether to introduce an amortization program for equipment, in order to make machinery available to firms with low or no capital budgets. The feeling was, maybe it’s too late, maybe the recovery is already here.

But, maybe not. Why not develop a set of financing options now, well in advance? Be ready to go with a financing program that works in an up cycle and another one that works in a down cycle. No matter what happens in the economy, you have the right offer. Viola! No more uncertainty angst.
.-= Brad Shorr´s last blog ..The Google Chrome Browser Diet =-.

Bill WelterNo Gravatar

in August 21st, 2009 @ 08:31

Brad,
Agreed! this goes well along with the “think in ranges” and adds action items to both ends o fthe range.
Bill

Fred H SchlegelNo Gravatar

in August 24th, 2009 @ 21:21

Pairing the term reasoned with risk is interesting. Reminds me of a story I heard about why the idea of boat excursions was actually working out to the casinos advantage here in Illinois. Seems that folks would change their gambling behavior during the last five or ten minutes of the session thinking they needed to ‘make up the losses’ or ‘take advantage of a winning streak.’ Net result was that those last ten minutes were the most profitable for the boats. Making sure your not being unduly rushed might make sense.
.-= Fred H Schlegel´s last blog ..Defining The Definition Of Brand =-.

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