By Karen Firestone
MARCH 11, 2016
Karen’s latest piece featured in the Harvard Business Review discusses the impossibility of avoiding risk altogether.
Kalinda has a high-paying job at an investment company and lives outside of Boston with her fiancé. They love running in the parks near their home after work and mountain biking and skiing on the weekends. The problem is that Kalinda works such long hours that she never actually gets to enjoy these activities. She grows to hate her job, finally interviewing with a smaller company that offers her a salary that’s only 60% of her current position — but with a more reasonable work schedule and the chance of a partnership within three years that would entail a much higher expected compensation. She ultimately decides that’s just too risky, so she stays in her current job.
Phillippe is sick of renting. His realtor takes him to view some gorgeous new lofts at a converted cotton factory in Providence, Rhode Island. She points out that it’s right next to a new office park where a hot new app company has just moved in. With their growth trajectory, numerous new workers will be moving in, increasing demand and increasing housing values. Phillippe buys a unit.
Dean loses half his stock portfolio in 2008. He can’t stand the idea of losing any more money, so he sells his entire equity account in 2009, very close to the bottom of the market. Two years later, he is still sitting on this pile of cash. After hearing a lecture from a motivational speaker and doing some research online, Dean uses most of this money to buy gold bars.
Kalinda, Phillippe, and Dean all considered their actions risk averse. As CEO of an investment firm and author of a book about risk-taking, I’ve had the opportunity to discuss risk with many people, and I’ve come to the conclusion that although most of us consider ourselves risk averse, what we consider “safe” behavior often contains much more uncertainty than we suspect.
That’s because safety generally involves consistency of a condition — whether that’s job security, a stable marriage, or the value of a currency. The challenge is that there are very few environments that actually remain static. Change is the norm, not the exception. And yet we behave as if the current state will persist.
So Dean bets on gold at the peak price of the metal. He eventually loses 35% of the value on his purchase when the price of gold drops. Phillippe moves into his new condo, but the app company in the adjacent office park goes bust after Apple starts including a similar app in the latest iOS. The office park remains only 50% occupied five years later; instead of increasing, the value of Phillippe’s apartment has fallen 20%. And as for Kalinda, a year after she turned down the job offer from the smaller firm, she’s fired in a round of downsizing. After nine months of searching, she takes a job at a comparable salary, but at a company with fewer growth opportunities.
Faced with setbacks like these, I’ve seen too many people throw up their hands. “No one can predict the future!” they say. But while that’s true, there are a few tactics we could use to get better at evaluating risk.
For instance, if he had done any research, Phillippe would have quickly discovered the presence of excess commercial and residential inventory in the Providence area. He didn’t need to know that Apple has a long history of absorbing popular third-party apps. He didn’t need to evaluate the managerial skill of the app company’s CEO. He just needed to ask what the overall level of occupancy was in the area and whether there was sufficient demand for new space. Taking the time to research the possible outcomes and just a couple of the factors that might affect the local housing market would have put a damper on Phillippe’s enthusiasm, leading him to a better investment.
Dean did do research but didn’t get it from credible sources. A financial planner could have pointed out the possible consequences of selling at the bottom of the market, reinvesting money in an undiversified portfolio, or the inherent volatility over time of all commodities, including gold. Dean should have bounced the idea off an actual expert — maybe several of them, if he didn’t trust one person’s opinion.
For her part, Kalinda now recognizes that she should have paid closer attention to the risks at her former employer, including excessive spending across the enterprise relative to the level of new business and performance results. There were bound to be headcount reductions, but Kalinda avoided thinking about that. She’s now better at recognizing that the status quo also comes with hidden risks, that sometimes the cost of inaction is higher than the cost of action.
Those of us who maintain that we are not risk takers might consider applying some of these strategies: doing research on multiple potential avenues of action, getting expertise from credible sources, and evaluating the risk inherent in the status quo.
It’s virtually impossible to totally avoid risk, and the perception of a truly limited downside can be an illusion. We need to acknowledge and fearlessly accept the potential presence of unanticipated shifts in our companies, markets, technologies, and even relationships.