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What Is a Calculated Risk?
A calculated risk is a carefully considered decision that exposes a person to a degree of personal and financial risk that is counterbalanced by a reasonable possibility of benefit. Assessing whether or not a risk is worth it involves careful cost-benefit analysis. Typically calculated risk applies to a business risk, but people can calculate risk in their personal lives as well. Everyone from a business executive to a gambler in Las Vegas to a smitten teen pursuing a big crush inherently takes on some amount of risk.
If a choice pushes you beyond your comfort zone and makes you vulnerable—whether financially, emotionally, or in terms of personal reputation—that is risk. But when you weigh possible outcomes and determine that the expected return of a positive outcome outweighs the relative risk of a negative outcome, you can say you are taking on calculated risk.
What Are the Benefits of Taking Calculated Risks?
Calculated risk is an unavoidable component of business success, so it is wise to mentally embrace the idea before you even draft a business plan. The fact is that most entrepreneurs have to put up some of their personal assets in order to finance early operations. If you can get past the level of fear that comes with such a risk, many benefits can await you on the other side. When you spend money to hire staff, rent office space, or build a prototype, you lay the foundation for the future growth you’ll need in order to succeed.
4 Tips for Taking Calculated Risks
When entrepreneurs make a plan of action for launching a new product or new venture, they break down the kinds of expenses they expect to incur and the risky changes to their own personal life—such as quitting a job or relocating. They then assess the possible outcomes and determine if the chances of success merit the risks. They simultaneously assess the chance of failure, and weighing these two factors, they determine whether a risk is worth taking.
Whether you’re a natural risk taker or a risk averse person with a strong fear of failure, here are five tips to help you navigate the risk assessment and risk management that come with a new venture:
- Recognize that geography matters. As you perform risk analysis on your potential venture, think about where you’re located in relation to the markets you wish to reach and the partnerships you will need to achieve your goal. The San Francisco Bay Area has attracted many start-ups due to its proximity to venture capital and a wealthy consumer base. But a calculated risk taker may look at the Bay Area market and find it oversaturated, thus offering more potential risk and a lower odds ratio for success. Depending on your industry, it may make sense to locate a business elsewhere—although any location will feature its own relative risk.
- Look for free publicity. A lot of start-ups burn through money via promotions. One way to mitigate risk is to rely on news media for free publicity. Any entrepreneur would kill for a writeup in the New York Times or Wall Street Journal, but prepare to start small, like in a local newspaper or on someone’s podcast. Making yourself available for media interviews—no matter how small the publication—is a good way for calculated risk takers to limit their financial exposure.
- Learn from the best. You certainly do not need an MBA to understand how to manage calculated risk, but it’s nonetheless important to educate yourself. If you learn to think like respected decision makers, you’ll make great strides in your own risk reduction.
- Embrace the right attitude. The business world is filled with calculated risk takers who understand when to take action and when to walk away. These risk takers are not deterred by fear of failure or an inability to make decisions. While most business leaders are appropriately risk averse, none are so conservative as to never take chances. The fact is, entrepreneurship isn’t for everyone; the people who succeed are often those with a healthy balance of caution and proactiveness. If you can embrace a mentality that sufficiently balances the two, you will develop an essential character trait for business success.
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