During my days in banking, everything was about risk versus reward. Riskier loans were charged higher interest rates. Investments with high risks paid larger dividends. Simple.
It wasn’t long before the principles of risk versus reward was engraved into my business mindset. It became second nature. Yet after I left banking and began coaching, I realized not everyone understands this concept.
To put it clearly, with greater reward comes greater risk. If you use a financial advisor, you likely know these teachings. There are always speculative stocks that have the ‘potential’ to grow rapidly, but they also have great risk.
Who knew Apple or Facebook would take off the way they have? For those who took the risks with these stocks, the rewards have been significant. However, the road to these rare winners are littered with duds.
This risk reward conundrum is not limited to financial matters. Life has its same risk-reward (R&R) dynamic. Think about decisions to make big changes in your life. There are R&R factors.
- Should I take that new job?
- Should I marry him/her?
- Where should I live?
- What kind of car should I buy?
- Will the new apartment be a better deal?
As managers we face R&R issues too, but the stakes are greater. Why? Because our people are involved. Having someone else’s destiny in your hands makes the R&R decision that much tougher.
Ways to Handle Risk vs Reward
What factors do you use to make decisions based on the R&R factors? Consider these:
1. Have a clear understanding of the reward – Don’t let presumed results sway your decision process. Get clear definitions and an understanding of the expected results.
2. Count all the costs – The Bible asks who would build a building without knowing all the costs? That’s a rhetorical “who” question. Clearly you must know more about the risk components.
3. Get opinions – Seek counsel and make more informed choices. Don’t ever feel like you have to go it alone. Ask for input from trusted advisors and even from within your team. Sometimes they know more about the risks being taken.
4. Know how much is enough – Small gains that are achievable, performed consecutively, often make for better long term results. Avoid the outright “bet the farm” mentality. Also, by landing small wins, you and your team can build a momentum of success from which to launch future endeavors.
5. Don’t get paralyzed by risk – Any amount of gain requires some risk. Avoid being so afraid of risk that you miss out on the rewards.
The next time a decision is required, ask yourself whether a risk-reward analysis is part of the discussion.