Sterling Terrell

recovering economist

A Leaders Necessary Exposure To Risk

A Leaders Necessary Exposure To Risk

I have been thinking about this tweet all day:

In business, you need some exposure to risk to be trusted.

Good grief, I mean, the number of executive board members, CEO’s, mid-level managers, and bureaucrats out there that pay virtually no price for making terrible decisions is mind-blowing.

The best analogy I can think of is how the average person treats a rental car vs. their own.

Maybe if it was your company – and your money – you would take fewer trips, buy fewer drinks, write off fewer mistakes, and make fewer excuses after losing money year after year.

How easy it is to spend someone else’s money…

I read somewhere that a company was looking for a CEO and that the only requirement – beyond general competency, experience, and know-how – was that they invest their entire life savings into the company.

That sounds like a good idea to me.

More?

Understand: Mangers need skin in the game.

Entrepreneur Risk Test

Entrepreneur Risk Test

Entrepreneur risk is an odd thing, I think.

We tend to believe that entrepreneurs take these big risks to get ahead, but it does not happen like we think.

So here goes.

Which would you want?

  • $5 million profit with a 20 percent chance of success
  • $2 million profit with a 50 percent chance of success
  • $1.25 million profit with an 80 percent chance of success

I had first thought to look at the expected value. But they are all the same:

  • $5 million * .20 = $1 million
  • $2 million * .50 = $1 million
  • $1.25 million * .80 = $1 million

However, if this is correct – the only difference in these options is the chance of success.

If that’s the case, who wouldn’t want the safest bet?

Of course, maybe I am taking too much for granted.

Maybe only entrepreneurs think like this?

In one representative study of over eight hundred Americans, entrepreneurs and employed adults were asked to choose which of the following three ventures they would prefer to start: (a) One that made $ 5 million in profit with a 20 percent chance of success (b) One that made $ 2 million in profit with a 50 percent chance of success (c) One that made $ 1.25 million in profit with an 80 percent chance of success The entrepreneurs were significantly more likely to choose the last option, the safest one. This was true regardless of income, wealth, age, gender, entrepreneurial experience, marital status, education, household size, and expectations of how well other businesses would perform. “We find that entrepreneurs are significantly more risk-averse than the general population,” the authors conclude.

-Adam Grant, Originals

Sterling Terrell