Risk vs. Reward
Taking calculated risks
Are you a risk-taker? Of course you are. So am I.
Everyday of our lives we take risks. You take a risk by driving or walking to work. You take risks in the decisions that you make each day.
We take risks in our careers and businesses. We take risks in how we invest. We’re taking risks all day, everyday and we don’t even fully realize it.
There are of course different levels of risk. It’s generally true that the greater risk a person takes, the greater the reward. Small risk, small reward. Big risk, big reward. This is the risk-reward tradeoff.
Life is about taking risks. How many times have you heard that? But it’s how we analyze and evaluate the risk that’s important. It’s a balancing act.
We have to weigh the upside vs the downside. The positives vs the negatives. What’s the payoff but at what cost?
We love to focus on the possible upside but forget of the possible downside risks. Does the potential outcome warrant the risk? How much risk are you willing to take? You want to make a calculated risk.
A few years ago my wife and I were struggling with trying to make a big life decision. On her advice we made a chart. She proceeded to grab a piece of paper and drew a line down the center.
On the left side we wrote cons/risks. What are the risks associated with this decision? What would happen if we fail? What do we have to give up? This is where we would put the monetary costs along with the time and energy that it would all entail. On this side I will also write, what’s the worst that can happen.
On the right side we wrote pros/rewards. These are all the positives. What could result from this decision as a positive. What rewards could stem from this if it succeeds or we decide to go this route. If we do this, what does the future look like?
This is how we weighed the risks and rewards. We wrote it all down. This allows you to see the entire picture right out in front of you.
By not writing it down you’re playing it through in your head over and over. You’re trying to remember and go off memory. It’s challenging. This is where the stress in making decisions sprouts from. You’re constantly using brain power trying to remember both sides. It’s exhausting!
All the possible outcomes, risks, sacrifices whether they’re positive or negative are all in front of you on a piece of paper. This is the simplest and clearest way I’ve found in making a calculated risk on anything.
This can be used for changing jobs. Starting a business. Making a certain hire or creating a new role to hire someone for. Deciding what investments you want to make. Making major life decisions like buying a home, having kids etc.
I use this process for any decision that I’m struggling with and so can you. The next time you’re struggling with a tough decision, weigh the risks versus the rewards to make your best calculated risk. Pull out a piece of paper and see what it shows you.
The Coffee Table ☕
This week Tadas Viskanta celebrated 17 years writing his blog Abnormal Returns in a piece called, Authenticity is the only path forward. I have Michael Batnick to thank for telling me about Tadas and Abnormal Returns a few years ago. Each day he sends an email with links to all the important stories to read on any and all topics. I’m honored to say that Spilled Coffee content has been featured in it numerous times. Congrats and thanks for all you do for us Tadas.
The Ramp Report wrote a great post on his experience building a home. The post is called Murphy’s Law. I’ve built three homes and what he details in his painful process is spot on. People either love it or hate it. The home building process isn’t for everybody.
As I’ve said in the past you just have to read everything Morgan Housel writes. His post Little Rules About Big Things is a collection of things he’s come to terms with. There is lot of knowledge and wisdom he drops in this post.
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