Today's To-Do List: Rethink How You Perceive Risk

When I was in my 20s, a deputy caught me on radar going 153 mph on my motorcycle. Fortunately I didn't get a ticket, since the going rate for an idle landing strip, an airport employee willing to look the other way, and a less than by-the-book law enforcement officer was two cases of beer.

Risky? Stupid? To me, no. I wanted to know my bike's top end and I picked a safe way to find out, under a situation I could control. (I did a lot of riskier -- heck, idiotic -- things to earn a reputation sufficient to cause a state trooper to force me into a ditch when he thought I wasn't responding quickly enough to his siren.)

Risk is a lot like speed. Our perception of risk, like our perception of speed, follows an ever-decreasing curve. The difference between 30 mph and 60 mph feels huge, the difference between 60 and 90 less so. Going from 90 to 120 is noticeable but not dramatic. And the difference between 120 and 150 is certainly perceivable but not significant. (It really isn't unless you pop your head up above the fairing, in which case the wind resistance makes your head feel like it's going to pop off.)

Gambling is a classic example of an ever-decreasing perceived risk curve. Once you overcome your hesitance to place the first bet, placing subsequent bets is a lot easier. Tossing down another $100 after you've already bet $400 doesn't seem like so much -- even though it's still $100.

The same is true with owning a business. (You took a major risk simply by taking the entrepreneurial plunge.) Invest $20,000 in a project, and by comparison tossing in an additional $5,000 doesn't seem like a lot of additional risk. Mortgage your house to raise capital, and borrowing against credit cards doesn't seem too much riskier. Extend credit to four customers, and extending credit to one more customer is fairly easy.

After you've taken on a lot of risk, taking on a whole lot more risk just doesn't seem like that big of a deal anymore.

Sound like I'm risk averse? Obviously I'm not. As a business owner, if you don't don't take calculated risks it's nearly impossible to succeed. But for every success story of an entrepreneur willing to borrow against 5 credit cards, get a second mortgage, and raid the kids' college funds on the way to business fame and fortune, thousands of people take on too much risk and fail.

Those stories don't get written because those stories aren't uplifting or sexy.

So today, do this: Start thinking of risk in absolute rather than relative terms. Evaluate your current risk exposure, then any risks you're considering. If you've invested $20,000 in a project, fine. If you're considering investing an additional $5,000 in the project, don't compare that $5,000 to your initial investment and think, "Well, really, I'm not risking that much more, since I've already got $20,000 in it..."

$5,000 is $5,000. When you evaluate whether or not to take a risk, don't think about chips already in play; those chips are irrelevant. Make sure you consider every risk you take in absolute terms, not in relative terms.

Photo courtesy flickr user madnzany, CC 2.0