Risk is defined as the chance of loss, explained Glenn Rothman, president of Hearts On Fire, in his seminar about risk assessment in business.
“We can’t quantify the risks we take every day. We cook, we drive, we walk, and so forth. We take lots of risks without knowing the rules of the game in lots of decisions we make.
“But in some decisions, we can look at the probability, which is a complex balance of measurement and gut feeling.”
People have different tolerance levels for risk, he said. It is a balance of rational thinking vs. irrational thinking. For example, many people will choose a guaranteed $40 win over the chance of winning $100 or winning nothing. But ask them if they’ll take a guaranteed $40 loss or the chance of losing nothing or losing $100, and they’ll take the gamble.
Assessing risk has a certain level of bias inherent in it, but it also involves evaluating the probability of certain events happening a certain way, based on knowledge of similar situations and how they turned out, a certain degree of gut instinct, and a certain degree of evaluating experts’ opinions on how a situation might go. It also involves recognizing what one’s Achilles heel is, and it is important to have a recovery strategy if the plans don’t go as hoped. “If you’re going to bet the farm, you’d better leave yourself an out,” he said.
Effective decision-making is a process involving several steps. Frame the decision—get viewpoints from different people with different agendas from yours. Test your decision if you can. For example, try it out on a small audience before committing wholly to it. Have a business plan—running a business without plans is like building a house without blueprints. Finally, take what you learn and use it.