Henning Schwinum breaks down how to tell smart risks from dumb ones using a simple equation: divide potential reward by potential loss. If the quotient is above 3, take the risk. He walks through real examples like cold-calling a big account to show how it works.
Chapters
Not all risks are created equal. Actually, the ones you take every day can be easily categorized as either smart or dumb. Running a red light is dumb. Designing over 5,000 prototypes was smart for James Dyson when he designed his first vacuum cleaner. The opposite of taking a risk is to play it selling safe. And there are common dangers of playing it safe for too long. You don't win, you don't grow, you don't create, you lose confidence and you don't feel alive. If this is you, you might want to change your mindset regarding risk. Rather than perceiving risk as negative, you should view it as a balanced focus on both the downside of taking risks and not taking risks. A limiting mindset versus a liberating mindset. Tyler Tavoran created a very simple equation, a smart risk equation, to guide you towards smart risks that improve your life and away from dumb ones that subject you to unnecessary loss. The two important variables in the equation are potential losses, potential reward. Potential loss means how bad will it be? If there is a complete failure, you might rate it on a scale from 0 to 9, with 0 being no loss at all and 9 being some sort of horrible unacceptable loss. Potential reward means what's the outcome? If there is success, you can rate it on the same scale with 0 being no reward and 9 being a life changing, nearly unfathomable reward. The approach is to assess how bad or good things can be if you take any given risk. The simple equation is. The risk quotient is potential reward divided by potential loss. A smart risk is anyone where the the risk quotient is greater. 3. Now let me apply Tervorin's formula to a couple of sales scenarios. Calling on an account, that's a long shot. The potential reward is big. I'll put a 7 to it. The potential loss is small. You have nothing to lose, so the risk quotient is greater. 3. That's a smart risk. Second example is discounting that does not align with your company's ethics. The potential reward could still be great because you can win the business. Let's put it at seven. The potential loss. Great. So I'll put that at nine. That's a risk quotient of less than one. That's a dumb risk. Now it looks like a mathematical formula, but it really isn't. The two variables you assign will differ depending on the person doing the equation. We all have the ability to interpret the same situation differently. What looks like a smart risk to one person may be a dumb to another. The smart risk equation is simply a framework that you can plug your own variables into that will help you draw a picture of the risks you want to take in your life.
