Risk tends to get a bad rap. We associate it with things like losing money in the stock market, or riding a motorcycle without a helmet. But risk isn’t the enemy—it’s a permanent part of life. In fact, being proactively intelligent about risk is a prerequisite for seizing those breakout opportunities we talked about in the last chapter. Many more people would enjoy breakout opportunities if it were only a matter of tapping networks, courting serendipity, and being resourceful. The reality is that doing those things is usually necessary but rarely enough. There’s competition for good opportunities. And because of that, if you can intelligently take on risk, you will find opportunities others miss. Where others see a red light, you’ll see green.
“Risk” in a career context is the downside consequences from a given action or decision, and the likelihood that the downside actually occurs. Risky situations, then, are those in which the risk level crosses a threshold. For example, flying on a commercial airplane of a major airline is not risky because while the downside scenario of a crash is painful, the likelihood of a crash is extremely low. Meanwhile, the reward of rapid transit is significant. There’s risk when you get on a plane, but it’s so low that commercial flights are not risky.
Some entrepreneurs are irrational risk takers: cowboy types willing to bet the farm in pursuit of some crazy dream. But what sets the great entrepreneurs apart from the pack is not a high tolerance for risk per se, but their ability to judiciously assess and manage it. They strategically pursue only those opportunities with enough upside to justify the possible downside. It’s one of the key skills that makes entrepreneurs successful.
Risk is the flip side of every opportunity and career move. When George Clooney aggressively auditioned and sold himself for ER, it was a risk: the show could have been a high-profile flop. Confronting your boss about a problem you’re having with a coworker involves the risk of getting on his bad side. Negotiating for a higher salary involves the risk of seeming greedy. Freelancing on the side comes with the risk that your performance at your day job will suffer. “[I]f you are not genuinely pained by the risk involved in your strategic choices, it’s not much of a strategy,” says Reed Hastings of Netflix. This is as true for careers as it is for business. If you don’t have to seriously think about the risk involved in a career opportunity, it’s probably not the breakout opportunity you’re looking for.
The constant presence of risk is why every career Plan A should be accompanied by a Plan B and Plan Z. Of course, risk isn’t confined to career-related activities. Doing anything contains risk, including things we do every day, like going for a jog in the park or living in a world where there are nuclear weapons and earthquakes. Even inaction contains risk. A sick person who chooses not to see a doctor is taking on a risk by doing nothing. Inaction is especially risky in a changing world that demands adaptation (see the American auto industry, for example).
So we are all risk takers. But we are not all equally intelligent about how we do it. Many people think you get career stability by minimizing all risk. But ironically, in a changing world, that’s one of the riskiest things you can do. Others think acknowledging downside possibilities is a sign of weakness: “Failure is not an option!” may make for a good movie line, but it’s not good when formulating strategy. Rather than avoiding risk, if you take intelligent risks, it will give you a competitive edge.
Learning how to accurately assess the level of risk in a situation isn’t easy, for a few reasons. First, risk is both personal and situational. What may be risky to you may not be risky to someone else. There are people for whom quitting a job before having another one lined up is unacceptably risky; for others, it’s a fine proposition. There are people who forego earning income for several months to start their own companies; others wouldn’t dream of putting themselves in a situation where they aren’t guaranteed a steady salary and benefits.
What’s more, risk is dynamic. You are changing, the competition is changing, the world is changing. What may be risky to you right now may not be a month or year or five years from now. What’s the risk of ruffling your colleagues’ feathers if you lobby aggressively for a lead role on a project? It depends on murky factors that are always in flux. If you just got a raise and upgrade to your title, for example, it’s a different calculus than if you’re new on the job. Nothing is universally risky or not risky; it’s a matter of degree and it varies tremendously based on situation and personality.1
Assessing risk, while always difficult, is not impossible. Entrepreneurs do it every day. But they don’t use fancy risk-analysis models like those found on Wall Street. And neither should you. There’s no mathematical formula that could possibly capture the probabilities and range of outcomes of a dynamic start-up, let alone the dynamic start-up that is your career. It’s impossible to quantify the pros and cons of every opportunity. You will have time constraints. You will have information constraints. Moreover, your intuition is riddled with cognitive biases that get in the way of rational assessment. So here are a few principles to keep in mind to help you evaluate how risky an opportunity really is, and how you manage the risk that does exist.
Most people overrate risk. At our core we humans are wired to avoid risk. We evolved this way because to our ancestors, it was more costly to miss the sign of a predator (threat) than to miss the sign of food (opportunity). Neuropsychologist Rick Hanson puts it this way: “To keep our ancestors alive, Mother Nature evolved a brain that routinely tricked them into making three mistakes: overestimating threats, underestimating opportunities, and underestimating resources (for dealing with threats and fulfilling opportunities).” The result is that we’re programmed to overestimate the risk in any given situation.2
Sticks get our attention a lot faster than carrots do. Psychologists call this negativity bias, and it pops up all the time in day-to-day life. One stern warning to avoid working with a person makes a stronger impression than one glowing recommendation. Anxiety about how your boss will react to an unconventional proposal will overpower feelings of optimism that he’ll be impressed by your work.
Overestimating threats and avoiding losses may be a fine strategy for achieving evolution’s cold mandate to pass our genes on to future generations. But it’s not the way to make the most of this life. To lead a big and vigorous life, you must work to overcome this negativity bias. The first step is to remind yourself that the downside of a given situation is probably not as bad, or as likely, as it seems.
Of the voluminous research on risk, remarkably little of it actually analyzes how real businesspeople make real decisions in the real world. An exception is a study done by professor Zur Shapira in 1991. He asked about seven hundred high-level executives from the United States and Israel to describe how they think about risk in different scenarios. What he found likely came as a disappointment to architects of fancy decision trees. The executives surveyed didn’t calculate the mathematical expected value of various scenarios. They didn’t draft long lists of pros and cons. Instead, most simply tried to get a handle on a single yes-or-no question: Could they tolerate the outcome if the worst-case scenario happened? So the first thing you want to ask of a possible opportunity is, If the worst-case scenario happens, would I still be in the game? If the worst-case scenario is the serious tarnishing of your reputation, or loss of all your economic assets, or something otherwise career-ending, don’t accept that risk. If the worst-case scenario is getting fired, losing a little bit of time or money, or experiencing discomfort, as long as you have a solid and reliable Plan Z in place, you will still be in the game, and should be open to taking on that risk.
Management consulting firms frequently offer to pay for analysts to go to business school in exchange for a two-year commitment to work at the firm after graduation. Analysts who take the offer are making a four-year commitment in total: two years in school, two years at the same firm afterward. Precommitting four years of your life is riskier than career choices that allow you to pivot to Plan B if you decide something is not going well or if some other amazing opportunity came up. So when assessing a risk, if you realize you made a mistake, could you reverse your decision easily? Could you get to a Plan B or Plan Z relatively quickly? If the answer is no, the opportunity is riskier and should be approached more cautiously.
Michael Dell famously dropped out of the University of Texas to start Dell Computer. But his start-up wasn’t a sure thing at the time, so he managed the risk by hedging his bets. Instead of dropping out of college for good, he applied for a formal leave of absence so that if the company seemed to be going south, he could return to his studies with no problem.3 Dell took a prudent risk that preserved the option to reverse his decision and go to Plan B.
There will always be uncertainty about career opportunities and risks. Uncertainty is an ingredient of risk. And the more compelling and complex the opportunity, the more uncertainty tends to surround it. In all situations, you simply cannot know everything about all possible pros and cons. While you don’t want to make career moves on 0 percent information, you also don’t want to wait till you have 100 percent information—or else you’ll wait forever. Uncertainty makes people uncomfortable. But uncertainty does not automatically mean something is risky. Jetting off to vacation in Hawaii with no set itinerary introduces many uncertainties about what will transpire, but it’s not particularly risky. After all, how likely are you to have a bad time in Hawaii? When Sheryl Sandberg came to Silicon Valley from Washington, there were innumerable uncertainties. (Would California be a good place to raise a family? How would her reputation suffer if Google was a flop?) Had she treated all the unknowables associated with entering a new industry as serious risks, she would never have joined Google and would have missed out on a breakout opportunity. When it’s not clear how something will play out, many people avoid it altogether. But the biggest and best opportunities frequently are the ones with the most question marks. Don’t let uncertainty lull you into overestimating the risk.
Age and career stage affect your level of risk. Generally, the downside consequence of failure is lower the younger you are. If you make mistakes in your twenties and thirties, you have plenty of time to recover both financially and reputationally. You have parents and family to fall back on. You are less likely to have kids or a mortgage. Just as financial advisors counsel young people to invest in stocks more than bonds, it’s important to be especially aggressive accepting career risk when you are young. This is a main reason many young people start companies, travel around the world, and do other relatively “high-risk” career moves: the downside is lower. If something worthwhile will be riskier in five years than it is now, be more aggressive about taking it on now. As you age and build more assets, your risk tolerance shifts.
There will be times when what’s risky to someone else is not risky to you because your particular characteristics and circumstances make it a different analysis. Risk is personal. But there will also be times when people like you—people with similar assets, aspirations, and operating within the same market realities—will perceive something as riskier than it actually is. This creates an opening for you to go after an opportunity that your peers may be unwisely avoiding.
Warren Buffett has a mantra: “Be fearful when others are greedy and greedy when others are fearful.” It’s a competitive edge for him. During the 2008 financial crisis, Buffett bought U.S. stocks cheap when most Americans were scared and selling. You make money in the stock market when you believe something others do not. You buy a stock because you believe its price will be higher in the future than it is today. The sellers of such a stock believe the stock’s price will be lower in the future than it is today. In public market investing, as in many things, you achieve big success when you’re both contrarian and right.
To be contrarian and right about risk taking means you don’t just jump at the obvious high-risk, high-reward opportunities. Rather, you pursue opportunities that have a lower risk than your peers think, but which are still high-reward.
• Jobs that pay less in cash but offer tremendous learning. People focus on easily quantifiable hard assets—like how much they’re getting paid in cash. Jobs that offer less cash but more learning are too quickly dismissed as risky.
• Part-time or contract gigs that are less “stable” than full-time jobs. A little bit of volatility is less problematic than people think; in fact, it’s good, as we discuss in the next section. Many dismiss part-time jobs and contract gigs as being inferior to full-time work, but in reality, they are a terrific way to build the skills and relationships that help you pivot into a wide range of Plan B’s.
• Hiring someone without much experience but who’s a fast learner and much cheaper. This is a medium risk with high potential reward: fast learners can make up their inexperience. They tend to be undervalued by the market.
• An opportunity where the risks are highly publicized. Thanks to our innate negativity bias, the more we hear about the downside to something, the more likely we are to overestimate the probability that it will occur (this is why people tend to become more afraid of flying after news of a plane crash is splashed across the headlines). If the media, or people in your industry, talk a lot about the riskiness of a certain job or career path, it probably isn’t as risky as most people believe.
You can find opportunities with a favorable risk/reward dynamic in areas you know well and where your peers’ risk calculus may be faulty. For example, novice entrepreneurs sometimes freak out during a recession, bailing on their start-up idea because they think raising money is harder, getting customers to spend money is harder, and that a corporate job is more secure in difficult times. Experienced entrepreneurs know that in reality starting a company in a down economy has a lower risk than people think, precisely because other people are scared off by the risk. When you start a company in a recession there’s less competition for top-notch talent, customer dollars, press coverage, and more. Many incredible companies, such as Microsoft and FedEx, were started in the depths of a recession. That so many entrepreneurs perceive recession timing as high-risk actually makes it lower-risk.
What are the settings where you have a privileged position and better-than-average information to assess risk?
It’s generally assumed that certain careers are riskier than others. In 2003, in a paper called “Risk and Career Choice,” two economists estimated the riskiness of working in different industries according to the consistency of income streams and average unemployment levels of people in those careers.4 They referred to income fluctuations, including bouts of unemployment, as “shocks.” By their account, risky careers (more severe shocks) included business, entertainment, and sales. Nonrisky careers (less severe shocks) included education, health care, and engineering. Another way of expressing this is that risky careers were thought to be more volatile and nonrisky careers were thought to be more stable. These results jibe with conventional wisdom—risk-averse people may be teachers or doctors (or lawyers or bankers), whereas risk-taking people may be starting companies or trying out on Broadway. But is this assumption right?
In his book The Black Swan, Nassim Taleb writes about the unexpected, rare, high-impact event. The September 11 terrorist attack, the stock market crash in 1987, and the Indian Ocean tsunami in 2004 were black swans. They were impossible to predict beforehand, had a low chance of happening in the first place, and exacted a large impact. Joshua Cooper Ramo, a friend, in his excellent book The Age of the Unthinkable, argues that we should expect to see more black swans in our lifetime. Ramo believes the number of unthinkable disruptions in the world is on the rise in part because we’ve become so globally interconnected that a minor disturbance anywhere can cause disruption everywhere. When Asian or European economies falter, so does the U.S. economy. When there’s political upheaval in the Middle East, gas prices soar. Fragility is the price we pay for a hyperlinked world where all the slack is optimized out of the system.
The economy, politics, and job market of the future will host many unexpected shocks. In this sense, the world of tomorrow will be more like the Silicon Valley of today: constant change and chaos. So does that mean you should try to avoid those shocks by going into low-volatility careers like health care or teaching? Not necessarily. The way to intelligently manage risk is to make yourself resilient to these shocks by pursuing those opportunities with some volatility baked in. Taleb argues—furthering an argument popularized by ecologists who study resilience—that the less volatile the environment, the more destructive a black swan will be when it comes. Nonvolatile environments give only an illusion of stability: “Dictatorships that do not appear volatile, like, say, Syria or Saudi Arabia, face a larger risk of chaos than, say, Italy, as the latter has been in a state of continual political turmoil since the [Second World War].”5 Ramo explains why: Italy is resilient to dangerous chaos because it has absorbed frequent attacks like “small, controlled burns in a forest, clearing away just enough underbrush to make [them] invulnerable to a larger fire.”6 These small burns strengthen the political system’s capacity to respond to unexpected crises. Syria or North Korea or Burma do not have small burns; a fire there could quickly become a devastating catastrophe. In the short run, low volatility means stability. In the long run, though, low volatility leads to increased vulnerability, because it renders the system less resilient to unthinkable external shocks. It’s for these reasons that Chicago economist Raghuram Rajan told a Federal Reserve symposium in 2005 that “perhaps Chairman Greenspan should be faulted for allowing only two mild recessions during his tenure.”7 Without enough stress tests on the economic system, it became dangerously unresilient to a big fire.
This paradox—high short-term risk leading to low long-term risk—holds true for careers as well. In the past, when you thought about stable employers, you thought IBM, HP,
General Motors—all stalwart companies that have been around a long time and employ hundreds of thousands of people. At one point in their history they all had de facto (or even rather explicit) policies of lifetime employment. Imagine what happened, then, when market realities forced the companies to drop pink slips onto the desks of thousands of employees. Imagine what it must have been like for someone who thought he was a lifer at HP; his skills, experience, and network were all inextricably linked to his nine-to-five employer. And then: BOOM. He’s unemployed.
While today’s employers do not offer lifetime employment—the employer-employee pact has fully disintegrated, as we mentioned at the outset—some industries still offer some semblance of stability: it’s relatively hard to be fired, your salary won’t fluctuate much, your job responsibilities stay steady. These are the careers generally deemed less risky: government, education, engineering, health care. But compare someone working full-time in state government to an independent real estate agent. The real estate agent doesn’t know when his next paycheck is coming in. He has ups and downs. He has to hustle to build a network of clients and keep up with changes in the market. His income is lumpy, and sporadic big wins (selling a multimillion-dollar home) keep him alive. The government worker, by contrast, gets a steady paycheck and an automatic promotion every couple years. He always eats well … until the day comes that government pensions explode or austerity measures wipe out his department. Now he’s screwed. He will starve because, unlike the real estate agent, he has no idea how to deal with the downs.
Or compare a staff editor at a prestigious magazine to a freelance writer. The staff editor at a magazine enjoys a dependable income stream, regular work, and built-in network. The freelance writer has to hustle every day for gigs, and some months are better than others. The staff editor is always well fed; the freelance writer is hungry on some days. Then the day comes when print finally dies, the magazine industry collapses, and the staff editor gets laid off. Having built up no resilience, he will starve. He’s less equipped to bounce to the next thing, whereas the freelance writer has been bouncing around her whole life—she’ll be fine. So which type of career is riskier in the long run, in the age of the unthinkable?
Without frequent, contained risk taking, you are setting yourself up for a major dislocation at some point in the future. Inoculating yourself to big risks is like inoculating yourself against the flu virus. By injecting a small bit of flu into your body in the form of a vaccination, you make a big flu outbreak survivable. By introducing regular volatility into your career, you make surprise survivable. You gain the “ability to absorb shocks gracefully.”8
Some job paths automatically provide regular volatility (e.g., entrepreneurship or freelancing). In other jobs you’ll have to introduce shocks and disruptions manually. Do so by aggressively implementing the opportunity-creating strategies we discussed in the previous chapter (opportunity and risk are two sides of the same coin, after all): join and create groups, be in motion, take on side projects, hustle. In a phrase, say “yes” more. What would happen if you defaulted to “yes” for a full day? A full week? If you say yes to the conference invite you were tempted to skip, might you overhear a comment that ignites your imagination for a new business or new research or a new relationship? Perhaps. Might it also lead to some dead ends, mishaps, wastes of time? Sure. But both, in fact, are good: you benefit either from a serendipitous opportunity, or from the resilience you build if nothing immediately comes of it.
Pretending you can avoid risk causes you to miss opportunities that can change your life. It also lulls you into a dangerously fragile life pattern, leaving you exposed to a huge blow-up in the future. What’s more, you can never perfectly anticipate when inflection points or any other career-threatening event will occur. When you’re resilient, you can play for big opportunities with less worry about the possible consequences of unanticipated hiccups. For the start-up of you, the only long-term answer to risk is resilience.
Remember: If you don’t find risk, risk will find you.
• Reflect for a few minutes on risk in your life. Rank the projects you’re involved in by risk—from most to least risky. Then think hard about the real downside and upside possibilities and be sure you’re not exaggerating the overall riskiness. Where there’s uncertainty, are you mistakenly ascribing risk?
• Identify—and take on—risks that are acceptable to you but that others tend to avoid. Are you okay having less money in savings and taking a low-paying but high-learning job? Or maybe a month-to-month employment contract as opposed to something longer term? Go find a project with these sorts of risks. It will differentiate you from others.
• Make a plan to increase the short-term volatility in your life. How can you take on projects—or a new job—that involve more ups and downs, more uncertainty?
• Revisit your Plan Z. Is it still viable? If your Plan A were to unravel, will you still be in the game? Consult mentors in your network to help think through contingencies.
Have frank conversations with your allies and other trusted connections about the kind of risks they are able to take on. Knowing their risk calculus will enable you to help them more readily. Also, remember that if your risk assessment on an opportunity is contrarian, other people will be deterred by it. Test how contrarian your idea really is by gauging how your network reacts to it!