How to become more of a risk-taker?

Have you ever seen those virtual stock market games? The best strategy is to minimize your portfolio diversification as much as possible, then as a secondary consideration factor in your market analysis. This works since you have no real downside risk and because someone will plunge everything into some whiz bang stock that goes up forever, hence a balanced portfolio will never win. In the real world, there are people who use this strategy, but 99.999% lose everything and the 1 person out of 100,000 who makes a fortune is displayed to the world as a great (albeit probably temporary) success.

But usually in the real world, the long term successes are the ones who diversify without ever risking more than 10% in any one position, even then 10% is extremely aggressive. The key is good money management to ensure when you make a mistake, you will still be around to play another day.

I don’t know you, but it kind of sounds like you might be one of the people who have their act together — but you’re looking at the 1 in 100,000 long shot wondering if it could have been you. The imagined results of a decision you didn’t take will always look unflawed.

Having said that, here are a few tips for handling risk that might be useful:

1. Accept the fact that you will make mistakes and lose money. Possibly even customers, reputation, etc…
2. Properly analyze the risk / reward balance. If your risk is minimized to ‘lost opportunity’ costs and the likely reward is triple digit growth, then it’s a prudent risk.
3. Don’t forget to factor in any transaction costs to exit your position as part of your risk.
4. Establish a ‘stop loss’. Know what is acceptable and what isn’t. Draw the line before you make a commitment.
5. If the risk is too high, find a partner who will share the risk and reward with you.
6. Risk is a personal thing. What one person can handle without even thinking about it will make another person lie awake at night. You have to know and accept your own comfort level.
7. The most important part of risk taking is prudent risk management.
8. Structure your contracts so your risk is minimal as well.

Most of what I said above comes from trading advice I read long ago. Risk analysis is a major part of trading, so if you want to learn more about risk management, I’d suggest reading some of those books.

I disagree that "taking more risks" is necessarily a good idea, or something you should work on.

I feel like you do: That I'm super-conservative, that I'm not willing to take even calculated, sensible risks. And it's worked out really well, because I make careful choices. Because I look to mitigate downside before I worry about upside.

I think these are all healthy attitudes in startups. Not the right attitude for a VC of course, but if you don't intend to "swing for the fences," then playing it safe means vastly increasing your chance for success.

The goal is "success," not "more risk."

I get the same feeling in the pit of my stomach and the same voice in my head, but I just ignore it and do it anyway. It's really, really hard - you're overriding your very sensible instincts - but it's really good fun. Exhilarating.

As Teddy Roosevelt said (about bear hunting), the thrill is in overcoming your own fear.

More practically, one technique is to talk yourself through what could reasonably go wrong, and think about how you can mitigate those risks. Say you want to hire somebody. What's the worst that could happen? You might have to let the person go in a few months time if you can't pay his wages. So put him on a short term contract and be up front that there's a chance this could not work out, but if it does then he'll have the time of his life.

There's a difference between taking smart risks and being stupid. Taking out a second mortgage and running up personal credit cards is just plain stupid. I think the best way to be able to stomach more risk is to work your ass off to be in the position to take financial risks and not let them hurt you. Get out of debt if you do have some, and build up an emergency fund of 6 months of personal expenses and don't touch it. Then you'll be in a much better position to risk some cash and not have to sweat it.

I like what John MacIntyre wrote in the answer above. Expanding upon this, I think people in many different professions must be comfortable (i.e., stomach) taking risks, and there's much to be learned from how these people analyze and raise their comfort level around risky decisions.

Along these lines, I remember reading a book called "Take the Risk" authored by a neurosurgeon named Ben Carson. This book notably includes a straightforward risk analysis technique, which is to ask the following 4 questions before making a risky decision:

1. What's the best that can happen if I do this?
2. What's the worst that can happen if I do this?
3. What's the best that can happen if I don't do this?
4. What's the worst that can happen if I don't do this?

In my own experience, using the technique above has supported certain decisions, such as whether or not to leave a big, presumably stable company for a startup.

I think each question serves a purpose. Answering the 2nd question, for example, may help you realize the worst thing that can happen if you make the decision may not be too bad (e.g., if the startup fails, you can find another job, but with lots of new skills and experience to offer). Similarly, answering the 4th question may identify potential downsides with respect to the status quo.

I agree with Jason that you it's not something that you need to work on even though unlike Jason, I'm a risk taker.

As other point out, there's a down side to taking risk. You could loose your house, your business, etc.

Don't waste time and energy on trying to change a basic personality trait, mainly since it looks like you're actually quite successful. You started a business and you're growing.

Taking more risks could accelerate things, but instead, focus on improving the business in ways that fit your style. If you keep doing things in away that feels right, you'll keep growing, and if it's 20%/year instead of 50% a year, that's OK. You'll still do very well in 10 years.

The trick is going to be able to identify the right opportunities for risk taking.

1. Pay Attention: Start identifying the opportunities for risk taking and start looking at them as opportunities not a threat or panic situation.

2. Setup a Mentoring Board: I think you should look around the business community and identify 5 Smart seasoned leaders who all have the qualities of risk-takers, but leaders who you also respect their judgement and business practices, and ask them to sit on a board that you will ask questions to time to time. Take your identified RISK opportunities to them and say: "here is an opportunity that i typically in the past wouldn't act on just yet, but I want to be more risk. do you agree that this would be a time where I should take a leap of faith..." and see what advice your board gives you.

3. It's ok to make mistakes. There has been many studies that show that we learn faster and grow smarter from making mistakes quicker and more frequently as opposed to waiting and then not giving ourself the opportunity to learn.

Why would you even want to attempt to change your risk-tolerance? Frankly keeping all the fortune-cookie BS aside, to quote you:

here's the problem. I'm not learning from my mistakes. Years and years into this, I still find myself doing this, yet I can't stop. I'm "pretty certain" of things, yet want to wait until things are "all but guaranteed"before moving on them.

So looking at that I am guessing you have already gone through all the self-help sections in libraries and bookstores, already fantasized about the potential profits and the major fictitious losses due to opportunity costs, i.e. regretted not being able to earn those awesome profits that you could have earned in an ideal world.

Perhaps the biggest and most futile risk you will ever take is trying to change yourself, as it will take years to achieve (the years you may have already spent are just the beginning), if the probabilities play in your favor and you manage to make the ranks of 0.01% of people who actually change you will be left with two problems:

1. You have absolutely no idea how this is going to affect your business, you may be able to take more risk, but are you sure your edge is not being risk-averse. Being risk-averse can be an asset.

2. Unfortunately, I think you dont even know what your actual risk tolerance levels are; the all but guaranteed in your statement has a high likelihood to be an outcome of a lack of a guaranteed max level of loss aka a Stop Loss!

I believe John MacIntyre came the closest to this point so far, and he does have some great point but to elaborate on what he was saying, plus argue a few points.

1. If the risk is too high, its not worth it! A partner may reduce the $ figure share on the risk, but it will also reduce the % share of profits, AND it will still not be worth it!
2. Risk Analysis is awesome, but for the most part for most people include way too many variables that are out of our control, hence making it a quasi-luck analysis, hence worth crap.
3. I do not mean that you should not do Risk Analysis, but rather that you will need to eliminate all variables that are not in your control, most likely you will be left with the $ value of the maximum loss as the only variable(along with the projected time to achieve ROI).

Avoid basing any analysis on "Opportunity Costs" instead go for "Stop loss vs ROI analysis" while these sound exactly the same, and in theory are the same in practicality, opportunity costs will always be lagging indicators that are an outcome of a beautiful mix, of seeing someone else be successful doing the same thing or regret! it will always push you towards the direction of recklessness due the innate quality contained in the word "opportunity" to make us believe that opportunities have a very short expiry date thus helping induce recklessness!

The fact of the matter is among early adopters of technologies and ideas the probability of a high ultimate (not immediate) success of an individuals and organizations are usually an anomaly!

That said, I usually allocate funds(the $ value of my stop loss) for each business plan, trade, or any kind of investment, and aim for a maximum of a 100% loss on the downside, not a penny more.

Through the years I have found that explicitly spelling out how much I'm prepared to lose on an idea and then staying focused on that scenario forces me to accept the possibility of loss rather than fight it, or second guess my decisions. It a psychological trick that helps me see my idea through while ensuring that I remain emotionally detached from my idea.

So essentially while on one side I can get classified as a very high-risk taker the fact is my risk is always very controlled and usually depends on a single variable (the $ value) hence making me less reckless and risk-averse in a sense! So my counter question to you is:

Are you sure your problem is not being able to take risks? or is it rather not knowing how much risk you are taking? Cause they are very different...

The premise of this question seems to be that startups and other business ventures are successful due to luck vs. long odds, and that the best way to increase your chances of success are to take more risks.

This is not true, for the reasons John MacIntyre outlines above. Why do startups fail? Either they run out of money or the founders/employees get worn out and give up. (I'm echoing Paul Graham - How Not to Die)

Startup success is more a matter of determination and consistent effort than risk taking. Manage your risks, stockpile your cash, and stockpile your energy/motivation. It's a long haul, not a rocket ship.

Part 1- I have been thinking about how to write this up so it is understandable. Here is the first of two things I found useful. This one helps now.

When faced with a decision and I hear that voice warning me about risks and fears, I use this paradox decision tool and exercise.

1. In the middle of a paper draw a perpendicular and horizontal line (cross) to make four quadrants. To the left of the horizontal line describe opposing force A. To the right of the horizontal line describe opposing force B.
2. In the upper left quadrant, list the benefits/advantages of A. In the upper right quadrant, list the benefits/advantages of B. In the bottom left quadrant, list the concerns/drawbacks of A. In the bottom right quadrant, list the concerns/drawbacks of B.
3. This last step is the key. Figure out ways to maximize the benefits and mitigate the drawbacks. What can you do to increase the positives and decrease the negatives of both A and B. Consider your values, setting boundaries and adjusting your standards.

This exercise helps me come up with a solution that is right for me AND I no longer hear that voice. It will help lead you to choices that fit for you.

Part 2-This second tool is about changing beliefs and replacing them with new ones. It is based on the idea our subconscious mind has beliefs that hold us back and prevent us from doing things we want to. We may have grown up hearing: Businesses go bankrupt all the time. Being self employed is risky. Debt is bad. If you listen closely you will hear that negative belief.

This is a brief summary on what to do. For 5 to 10 minutes daily focus on a positive affirmation statement that you have tailored to replace the negative belief. Some affirmation examples are: I am rich, happy, and successful now. I was born to be successful now. I trust in life; I am safe in the Universe. I live in a supportive, safe and abundant Universe. Repeat it over and over, contemplate it, and visualize it. Start taking small actions that demonstrate your new belief. As it takes 60 to 90 days for a new belief to take hold permanently, continue the exercise till the new belief is fully imprinted.

Two books with a business bent that touch on this subject are John Kehoe’s Money, Success & You and Napoleon Hill’s Think & Grow Rich.

Also, underlying the above exercise is the concept that we attract into our lives what we are thinking about whether we want these things or not. So what we want to do is think about and focus on what we want (a successful business and big profits) and not think about or focus on (bankruptcy, low profits, failing businesses).

In my opinion the most challenging task for any entrepreneur is to build and sell a company from scratch without any outside investment or debt financing.

If you have figured out how to do that then I'd say don't change a thing. You have my respect.

I wouldn't underestimate the negative impact that debt and investors (sometimes) can have on a growing company.

There are two things here:

• putting in personal/borrowed money into the enterprise
• giving up a part of the company for the growth of the company.

Probably you are mixing these two things up. It does not make sense to run the company on personal credit.

But cooperating with risk-takers (I mean VCs; who can afford to take risks on your behalf) who expect high returns in exchange of funds does make sense. Probably you already know the rules of thumb: be ready to give up a part of the company if the value of your share of the company would increase after that. It would probably be a little not-so-comfortable working with them rather than being your own boss, but it would make your business larger. Similarly, you should be ready to sign pacts with business professionals who can help expand your company, in exchange of some shares in the company. This is all calculated risk, taken after a lot of deliberation.

See http://www.xconomy.com/san-diego/2009/03/02/sharing-the-wealth-in-a-technology-startup-how-much-stock-is-enough/

Yes, of course I agree that you are not so much risk-averse as you seem to suggest, because you are already running your own company.

It's not that you're not taking enough risks, instead you're playing it safe by other people's standards. The people that "bet the farm" either have nothing to lose or believe that they can make it all back in five years.

My philosophy is to accept the decisions I make. Remember, it's the good and bad decisions that got you here. My advice is to just keep making the right decisions at this moment.

Remember, most risks are not big risks in hindsight. Keep that in mind the next time you have a decision to make.

Probably I have the same problem, but at some point, I have to accept that that's the way I am and I don't do anyone a favour if I take more risk than I can stomach, become ill (burnout etc.) and lose the game even though the original idea was correct. You should also remember that when you double your stake 6 times in a row, then lose it all, you still have nothing left.

If you don't get out of the box you'll never grow! I learned this the hard way..and if you di get a few steps ahead.. you want grow much because you need to take business and financial risks...I used to be very conservative and learned you can manage your risk but not taking any at all doesn't make you a real go -getter! It takes money to make money just be careful how you spend it...I spent tons of money on learning but today I got something out of that. If you beleive in yourself and what you have and founf a market for it then get past your little voice!!

I hate to give away my own personal secrets on taking risks, but here is something you should try at least once:

Travel to Thailand or Africa, Have unprotected sex with a prostitute, and then wonder if the prostitute was even a woman. That will teach you about taking risks!

Only idiots take unnecessary risks, such as taking a 2nd mortgage. Smart business people dont leverage when they dont have to, dont take out loans, and dont need pressure to fuel success. The reason you hear those stories, is because Americans just go nutts for examples of doing the wrong thing and still winning.

If you want to be smart, learn to look at yourself and your work. Look for what works, and what has not worked. Make changes.

The difference with business and gambling is that in business you can mitigate and reduce the risks by being smart, being good at what you do, and most of all learning from your mistakes and from your accomplishments. There is no reason to take on risks, unless if you are such a TIGHTWAD that you consider everything risky.

Do yourself a big favor, and dont look for trouble you dont need. Work smarter, and harder, not riskier.

PS. If you are planning a trip for Thailand let us know. Perhaps ill see you there

Alex, you and I (and everyone probably) share that same dilemma ... we feel certain but we really don't know what we don't know!... so we have certainty about a model that's not really as good as it needs to be.

I loved Gupta's answer and listen to Jason's 'smart bear' podcast... just making the effort to introduce myself to the distinctions these folks have is absolutely learning what's needed. It's remarkable how they think and it gives me some real evidence of where I am (in perhaps the College leagues) and how folks in the major's think...they figure out ways to take their business hypothesis on a small scale...they apply as rigorous a scientific method as they can to create real evidence for a supported guess.