Risk is a core part of entrepreneurship and building a startup. But it is fundamentally misunderstood. Risk seeking is conflated with risk tolerance. No good entrepreneur seeks risk. But they need to be able to tolerate and mitigate it. I’m writing about what I’ve learnt about risk.
Risk tolerance is a combination of 1) accurately recognising risk in the first place and 2) the ability to deal with uncertainty.
When it comes to recognising risk, human beings’ default state is a long way from 20-20 vision. Evidence loss aversion: where losses are twice as painful as the satisfaction from the equivalent gain. We excessively weight the downside risk. For more on the theory and proof behind loss aversion, Thinking, Fast and Slow is a fantastic read.
Our loss aversion is explained by the fact that our brains are playing evolutionary catch up. They are still conditioned by our ancestry, when loss likely meant death. Our brain’s risk recognition lens has not updated to the world we live in today.
I love the above image from the best resource I’ve ever read on this subject: The Cook and the Chef: Musk’s Secret Sauce by Tim Urban. Entrepreneurial and startup success is about seeing the opportunity in what could be regarded as, but isn’t actually, dangerous. That is to get as close as possible to 20-20 vision when it comes to risk.