Your Business Plan: Are You Taking Enough Risk?

Red dice with the words HIGH RISK LOW RISK and NO RISK

When working with our clients to develop their business plans, we often reach a place where a fear arises that can best be illustrated by the moment where entrepreneurs asking the question, “What if this doesn’t work?”

Entrepreneurship and business planning, by their natures, inherently contain the very real possibility, and often probability, of goals not being attained — and of the corresponding losses of time, money, reputation, and often the concurrent growth of self doubt.

The strong negative bias of our 21st Century media culture does not help in this regard. The constant drumbeat of danger and chaos about our economic and personal safety (especially in recent weeks) that emanates from the mass media creates the perception of a far more failure-filled economy than statistics show it to be. This can best be illustrated by the recent media coverage regarding the financial and job losses suffered in the residential real estate crunch. While this correction and its economic consequences are real, the statistical reality is that the vast majority of real estate markets have seen less than a 10% pricing correction. And this after many years of double-digit price appreciation, building significant real estate wealth for generous sections of the country’s middle class.

When faced with this nervousness and sometimes even panic from our clients, we often put our psychologist’s hats on and draw upon the Harvard Psychologist Daniel Gilbert — who has done ground-breaking work on the effect of negative experiences and failures on psychological well-being.

A synopsis of his core thesis is that we greatly overestimate the pain we assume we will experience regarding a prospective future loss. For example, when it comes to money, we are much more able to emotionally “connect” with the pain of a hypothetical loss than we are with the pleasure/joy associated with a hypothetical gain. And because we unnecessarily over fear prospective losses, our decisions, especially our economic decisions, are overly conservative.

It is important to actively correct for this “pessimism prejudice” especially when contemplating undertaking a new business and/or business growth initiative. In short, beware the trap of over-conservatism in strategic planning and thinking. If things happen to go badly, studies show us that the consequences, emotional and otherwise, will be far less than we anticipate they will be.

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