Monday MGMT Minute: How to Think About Risk

Read time: 1 minute

Early in my career, I thought the goal was to avoid risk. But risk is our gateway to reward. If there's zero risk, someone else has already captured the value.   

No, our goal is to take the right risks while avoiding the wrong ones.

The right ones are asymmetric to the upside (we lose little but win big).

The wrong risks may have an upside but can also wipe us out. And you can't win a game if you're no longer in it.

Many of the leaders we work with become paralyzed by risk.

Everywhere they turn, there's something else that "could" go wrong. And their boss wants all the positive outcomes without any negative consequences.

I worked at two companies whose entire business was managing risk: Bridgewater and Moody’s.

Here's how we did it.

Chances It'll Happen - Some risks are very likely. Others are outlier events, often called "Black Swans." List out all the risks you can think of. Give each one a probability of happening from 1 to 5.

Impact If It Does - Not every risk creates the same size problem. Some might cause a minor inconvenience, and others a total catastrophe. Give all risks above an impact rating 1 to 5 as well.

Put these two scores on a grid:

• Low Chance, Low Impact: Ignore - Not worth your time.

• High Chance, Low Impact: Respond - Deal with it when it happens.

• Low Chance, High Impact: Prepare - Can you offset the impact?

• High Chance, High Impact: Prevent - These are intolerable.

Cost to Prevent It - The last consideration is the cost to mitigate the risk. What would we have to spend to prevent it from happening or to lessen the blow if it does? These are just business investment decisions.

The benefit of this approach is emptying your mind of vague worry and converting that into a plan to address tangible risks. It also gives you a blueprint for staying aligned with your manager and team.

Lead on,
Dave & Mar

PS - We’re part of Maven’s FastTrack program. You can enroll in our MGMT Accelerator or MGMT Fundamentals for 25% off through tonight. 

PPS - I was a little late on last week’s full MGMT Playbook. If you missed it, I give you a glimpse into 3 real scenarios from my CEO coaching last week.