We live in a society that teaches us to be risk-averse. Rather than learning to embrace the potential pay-offs of a bold decision, we are too often quick to catastrophize and play it safe in fear of making the wrong choice.
Being risk-averse may be great for some aspects of your life, such as your health or your lifestyle, but when it comes to the world of business, it’s a toxic habit that needs to be dropped.
Succeeding in business, whatever your industry, is like playing a winning hand at poker. You can only ever win a big pay-off by betting large and laying your cards on the table.
Those that fold out of fear of losing never win a cent. Of course, when we talk about embracing risk, we don’t mean charging head-first into risky ideas and investments just because you have a good feeling about it.
Embracing risk means, above all else, embracing calculated risk. It means developing a winner’s mindset that knows instantly how to assess the right risks to take and when it’s time to go for it.
Incorporating risk into your business strategy will give you a crucial competitive edge, just like in poker. Here’s why you need to embrace risk to thrive, and how to do it the right way.
1. How Risk Creates Winners
For every Netflix, there are several Blockbusters in the cemetery of failed businesses. Whatever industry you’re in, there is always going to be intense competition.
Taking risk is often the only way to distinguish yourself from your competition and show customers that you have something different to offer.
Take Microsoft for example, the software company that is now one of the wealthiest entities in the history of the world.
Back when the Playstation dominated the console market, Bill Gates decided to invest massive, potentially ruinous amounts of capital into producing their own mass-market console, the Xbox.
There were countless think pieces from naysayers discussing how a software company couldn’t possibly produce a gaming console with broad appeal and, to be fair, sales were not looking good at the beginning.
However, Gates decided the best approach was to double down on the marketing spend and push the Xbox out as a viable alternative to Playstation, without having to undercut prices.
The result? They quickly became one of the giants of the industry alongside Sony and Nintendo.
A similar theme can be seen across the history of the most successful companies in the world.
The founders of Google almost sold the whole thing in 1997 for a measly $1.5 million, out of fear that their search engine would never catch on. Now it brings in over $138 billion in revenue every year.
Then there’s the streaming giant Netflix, which was derided by industry experts when it was announced that the platform would start producing its own in-house content and releasing entire series’ all in one go, upending decades of TV industry orthodoxy.
This was definitely a big risk, but Netflix had the research behind them, research that no-one else had bothered to do. In the end, Netflix’s in-house content ended up making more money than virtually any prime time TV series.
2. ‘Doubling-Down’ & The Art of Decision Making
As any professional poker player will tell you, the key thing to remember when successfully incorporating risk is to not get spooked and pull out when the going gets tough.
This is the art of ‘doubling-down’ and has been used by poker pros and business titans alike for decades. To illustrate what this means in practice, let’s take a look at a prime example of doubling down, taken from Space X and Tesla founder Elon Musk.
Musk made a pretty penny selling his stake in the payment platform PayPal and decided to invest it in two industries that no-one would have considered profitable: space exploration and electric cars.
A few months after his investment, things weren’t looking great and he had yet to close a big deal for his passion projects.
However, rather than cutting his losses and leaving the table, he stumped up the remainder of his personal capital (about $35 million) at the height of the financial crisis to keep his company afloat.
Just six months later, he managed to secure a multibillion-dollar contract for Tesla, and the rest is history.
So how did Musk know that doubling down was the right thing to do in this situation? Essentially it all comes down to an age-old psychological trick from poker strategy.
According to the laws of poker psychology, the only mistakes you can make are either tactical or mental. If you make a mental mistake, it’s because your fear of risk has blinded you to see the long-game, which is pivotal in poker.
It’s the reason people fold their hands despite having the winning cards. To avoid this, you need to take a considered approach to all of the factors and make a decision based on a long-term payoff rather than a short-term gain.
Because the best poker players do across the different variants such as Omaha and Texas Holdem. This is the art of doubling down.
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Caption: Just like in a game of poker, you need a clear head to take calculated business risks.
3. Knowing When to Pull Back
Of course, poker psychology will also explain why it is crucial to know when to pull back and when a risk you have taken may not pay off after all.
As the poker psychology link explains, it’s crucial to be able to identify when you might be making a rash decision.
Tactical mistakes occur when you’re at the top of your game, but you don’t have the right level of tactical knowledge to increase your chances of the risk paying off.
Tactical mistakes can be fatal to a business, and can only be avoided by learning from others and conducting a thorough assessment of your situation. Even if you’re confident about a risky situation, if you are blind to the potential pitfalls then it’s a sign you need to pull back and fight another day.
A thorough risk strategy is vital for every business decision you make. Only by considering all of the angles and knowing when to play it safe will you be able to take the kind of calculated risks that will set you apart from the rest.
Risk is an essential element of success. Learn from the masters so that you can take full advantage of the risk-averseness of others and see your business thrive.