Taking Effective Calculated Risks for Entrepreneurs

Leonard C. Green, entrepreneurship lecturer at Babson College, once said, “Entrepreneurs are not risk takers. They are calculated risk takers.”

He was absolutely right. When assessing a business decision, one of the first and most important things for an entrepreneur to understand is the difference between risk and calculated risk.

Risk is dangerous; risk takers go all in and wager everything they’ve got on a win or lose result. Calculated risk however, is the opposite of that, and involves doing everything possible to mitigate disaster.

Calculated risk takers are actually highly risk averse because, every step of the way through a decision making process, they further reduce their potential to fail. They take every available opportunity to save time, money and resource in order to cover themselves.

So how can entrepreneurs ensure they take the latter kind of calculated risks?

1. Know the value of risks

One of the biggest mistakes entrepreneurs make when it comes to assessing risk is failing to correctly assess potential value.

There is a psychological tendency to overestimate the repercussions of failure, and underestimate the potential success. The best entrepreneurs are the ones that can effectively visualise a result and then decide whether the possible drawbacks outweigh the potential for success.

One way to do this effectively is to break down decisions and assess them based on smaller, individual risks. Measuring each risk by the consequences of its positives and negatives can be a lot less daunting and develop an instinctive sense of what is and isn’t a good overall idea. For example, if something actually turns out to have far more positive outcomes than negative ones, it could well be a calculated risk worth taking.

This technique also comes in useful for breaking down decisions and determining what an affordable loss is.

Another way to calculate the value of a risk is with the probability of loss * value of loss equation.

Risk Equation

This formula states that every risk can be analysed by working out the probability of failure or loss, multiplied by the value that loss represents. For example, two PR campaigns, A and B, might have 30% and 10% probabilities of failure respectively. However, if campaign A has a value of loss of only £1,000 and campaign B has a value of loss of £10,000, campaign A represents a lower risk, despite being more likely to fail.

This particular risk equation doesn’t factor in the value of success, and so the best entrepreneurs will invest in developing their own robust risk management formulae.

 

2. Invest appropriately in research and planning

This brings us onto the next point, which is regarding research and planning, and entrepreneurs need to achieve the right balance of this to maximise their calculated risk taking.

To do this effectively, entrepreneurs need to take all of the above (assessing value, determining what they can afford to lose, etc.) into account, develop a plan and execute it.

Many entrepreneurs become so caught up in over analyzing each and every decision they have to make because of the associated risks, that they end up acting too slowly. (Or worse, not making a decision at all and missing out.)

There is a fine line between carrying out necessary research and taking so long over it that decisions lose impact. Entrepreneurs that take the most effective calculated risks assess the pros and cons, put a strong plan in place, then act with confidence based on their research.

 

3. Identify problems and develop solutions

Finally, the best entrepreneurs have contingency plans to mitigate loss. They know that taking calculated risks can involve errors, but the most important thing is that these do not completely derail a business and that entrepreneurs can learn from these mistakes, accounted for in advance, and adapt their approach in future.

Along the same lines, the most successful entrepreneurs will identify possible risks in advance of making decisions and develop strategies to overcome them.

This means that, if there are individual problems, these are factored into the process and there are pre-prepared solutions to implement.

This way, everything is calculated and, for the most successful entrepreneurs that are actually risk averse, calculated risks are as consistently effective as they possibly can be.

Chime in if you are an entrepreneur who has taken risks below.

Dan Yeo

Dan is a Content and Online PR Manager for an award winning UK digital marketing agency. He writes industry relevant advice for businesses and entrepreneurs on behalf of Spread Co.

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10 thoughts on “Taking Effective Calculated Risks for Entrepreneurs

  1. Thanks for the article Dan! I’ve taken some significant risks in my life. Two of them involved moves to new states in order to pursue a better career and lifestyle. I’m happy I did both, rather than live with the wonder of regret if I stayed stuck and frustrated (or with a stuck and frustrated spouse). My other risks involved creating and shipping something into the marketplace when I wasn’t sure what the reaction would be. The value of learning from that and knowing I could do it (and not die from embarrassment) made it very worthwhile. The greatest risk is not deciding to act and learn from it.

  2. Great advice Dan. My husband and I have had several offline businesses in our life and and we took big risks several times. Some worked out and one was a huge learning experience and very costly. Reading your article I can see the one that cost us was not properly calculated. Thank you.

  3. There is risk in all businesses. In big companies there are whole departments dedicated to mitigating loss. As a soleprenauer you have to be that dept!

    Thanks for the good info.

    Vickie

  4. Dan, this article is very enlightening. Most people think entrepreneurs just happen to know all the right answers and automatically become successful. They don’t realize the amount of research, hard work and persistence that is involved in getting to where they want to be. They don’t realize entrepreneurs learn from failures and getting back up to start all over. Thanks for sharing such meaningful content!

  5. I must say that I have not used any of these techniques before, when it comes to taking risks in my online business. I will now start implementing these ideas to help me make more calculated risks. I really like the idea of identifying the risks before I take them and identifying strategies to deal with them, this is great forward thinking. Thanks!

  6. Learning the art of calculated risk taking takes the edge off of just going all out and not knowing where one may end up. I for one will forever do my research when taking a calculated risk in my business. Identifying possible risks and finding ways to overcome takes some forward thinking and successful entrepreneurs use this tool for momentum toward success. I will be using these strategies for sure. Thank you

  7. I believe that taking risks is a huge part of an entrepreneurs mindset. Taking a big risk is a sure way to get really fired up to get something done, but I learned the hard way that it’s not always a good idea to jump right in without first evaluating and analyzing calculated risks. Look both ways before you cross the street.

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