Why the most forward-thinking individuals thrive by embracing risk

According to Facebook co-founder Mark Zuckerberg, there is only one strategy in business that is guaranteed to fail – not taking risks. Elon Musk doesn’t agree with Zuckerberg on much, but they agree on this. “This is how civilisations decline,” Musk has said. “They quit taking risks.”

Humans, however, find it inherently difficult to think about risk rationally. Research suggests that we tend to overestimate the risk of good or bad things happening in the short term and underestimate what we can achieve in the long term, such as building a business. Psychologists Amos Tversky and Daniel Kahneman have developed the concept of prospect theory. This is the idea that human beings don’t always make a rational decision when presented with the probabilities of any potential gains and losses. Tversky and Kahneman found that people can have an inherent aversion to loss. “People put much more weight on losses than gains,” Kahneman said. “People hate losing.”

Understanding the balance between risk and reward

Those who can think about risk more rationally and embrace it have an advantage. There is a reason why legendary investor Warren Buffett describes the chief executives of his businesses as the “chief risk officer”. It is a task that is irresponsible to delegate, he says.

This is not just about the threats you may face, but also the opportunities. It is about understanding the balance between risk and reward, the downside and the upside and the short- and long-term possibilities.

Tom Beahon, the co-founder of Castore, gained a new appreciation of risk when he failed to make it as a professional footballer in his early 20s. Until then, football had been what mattered most in his life. “To my mind – my little uneducated brain at 20 years old – the worst had happened. But you realise that the sun still rises the next day,” Beahon said. “Failure doesn't scare me; I've failed. What scares me is not being in control.”

Powered by an understanding that the worst could happen and he would still be okay, Beahon and his brother Phil founded Castore and built it into a business worth nearly £1 billion.

Nike co-founder Phil Knight also embraced the risk of failure as he built his sportswear business. “I’d have no money and I’d be crushed. But I’d also have some valuable wisdom, which I could apply to the next business,” Knight wrote in Shoe Dog, his memoir. “Wisdom seemed an intangible asset, but an asset all the same and one that justified the risk.”

Calculating risk with the help of frameworks

Sam Bankman-Fried, the co-founder of the disgraced cryptocurrency business FTX, thought he could take on the world by thinking about risk rationally while others floundered. In his words: “You should go for it way more than is generally understood.” But Bankman-Fried’s approach was flawed. As Caroline Ellison, the executive convicted of fraud in relation to FTX’s bankruptcy, told the court during Bankman-Fried’s own trial for fraud: “He talked about being willing to flip a coin and destroy the world, as long as a win would make it twice as good.” That’s fine as long as you win, but the downside risk is that if you lose it is game over - there won’t be an opportunity to take any more risks.

Those with a real appreciation for risk often have frameworks to help them think about it. These frameworks are built around an understanding of your current situation, the information you have available about the options in front of you and what you want to achieve. Andy Grove, the co-founder and former chief executive of Intel, said you should always try to think of yourself as an outsider rather than an insider. “If we got kicked out and the board brought in a new CEO, what do you think he would do?” he said to his Intel co-founder Gordon Moore. Jeff Bezos has a ‘regret-minimisation framework’, which is about making sure that when he is on his deathbed he has as few regrets as possible about the way he has lived his life. Rather than worrying about the risk of failure, he is more concerned about the risk of regret.

This all means that rather than being buccaneering risk-takers, successful entrepreneurs are often calculated gamblers, looking for areas in which they have an inherent advantage or an edge when taking a risk. They may be thinking about the opportunity cost even if they are successful, by asking “what are the chances that I could be doing something more productive with my time?”, for example and will wonder whether they should be protecting what they have, which can encourage them to be risk averse.

Simon Arora and his brothers built discount retailer B&M into a company worth more than £5 billion. But they avoided selling products online or launching advertising campaigns because they were concerned about the risk of these measures spoiling the magic sauce found in B&M’s shops. “You need a significant amount of humility if you want to be a successful business leader,” Arora says.

Pushing the boundaries

Yet an appreciation of risk also encourages innovation and pushing the boundaries of what is possible. Innovation, for example, is built on realising what downside risks you are prepared to tolerate that others aren’t because you think the upside is worth it. “Useful innovation usually begins with someone asking a big question that, for whatever reason, people have not asked before or have not been prepared to grapple with.” That’s the view of Ed Smith, the former chief selector for the England men’s cricket team, who made a series of bold, data-led moves while in the role and has subsequently written a book about decision-making.

As Will Shu, the MBA graduate co-founder and boss of Deliveroo, adds: “Taking some risk is important because otherwise you just have an economy that is focused on tick-box checking dividends. But 50 years from now, what's going to happen? The mining companies are going to be gone. The banks, who knows? Tobacco is going to be gone. And then what? What are you left with?”