The legendary race car driver, Mario Andretti famously said, “If you’re in control, you’re not going fast enough.”
This little piece of brilliance gives me chills and it makes me think of the idea of risk taking in general, especially if you are risk-averse. Going faster, fast enough to lose control or perhaps even crash your car and die is obviously a huge risk. But most likely it’s one you must take as a driver if you want to win.
How do any of us properly evaluate risk?
I have to admit that I always considered myself a risk-averse person. Most people are. Who likes risk? Who likes getting rejected or failing? Guilty as charged. Every risk I have taken in my life and career has been done with a large dollop of angst combined with a big spoonful of second guessing.
A great, recently published article about risk taking proposes making a list of pros and cons for every risk you consider. Nervous About Taking a Risk? Write a List of Pros and Cons. By Taly Reich, Alexander Goldklank Fulmer, and Ravi Dhar, February 2022, Harvard Business Review.
Reich, Fulmer and Dhar’s research finds that putting together a list of pros and cons – ambivalence – has an overall positive effect, stating, “We suggest that it acts as a shield against the fear of rejection; it lowers the desirability of a prospect just enough to make negative outcomes less threatening while still maintaining the attractiveness of the outcome itself.”
This is a great method, but I suggest going one step further. Attach numbers to it. Because the truth is always in the numbers. And you’d be surprised what you can attach numbers to.
There a name for this type of pro and con list and it is a Cost Benefit Analysis. That’s what I started to do and the process has transformed my self-ascribed description as a risk-averse person, to a calculated risk taker. That’s when the upside is much more valuable than the downside.
When you do a proper Cost Benefit Analysis, it can actually strengthen the proven positive effect because, instead of relying on your feelings or gut instincts, you can actually backup your decisions with numbers.
Take my own example of going back to grad school to get my M.A. in economics. At the time, it was a huge risk for me. In fact, my parents, who paid for my undergrad degree, refused to pay for my grad degree. My father thought it was unnecessarily expensive and wouldn’t add that much to my earnings potential. Even my pleas that I was accepted into one of the best universities in the country for Pete’s sake didn’t placate him. I went anyway. I took out school loans and was awarded a fellowship after my first year. It was scary but ended up being one of my better life decisions.
For this piece, I did a cost/benefit analysis of the same risk using current numbers. I used 2021 rates of master’s degree costs, an average that varies wildly as it includes everything from state schools to Harvard, but if you know what school you’re aiming for, you can easily obtain those numbers.
In this example, the “Benefit” would be $517,920 and the “Cost” is the expense and opportunity cost of not working of $196,132. (You may need to add in school loans and resultant interest expense if you have to go that route.)
On first glance you may think that $12,948 is not such a big difference. But when you multiply it out by 40 years of working, it’s a lot.
This analysis doesn’t even count raises. If you get a raise every year of 3% (compounded, of course), then your total earned by working forty years with a M.A. would be: $5,869,536 and your total with a B.A. would be: $4,893,240, a difference of $976,296 – almost a million dollars. So don’t feel too bad about those little raises.
You could apply this method to any risky decision you need to make. Starting your own company, accepting a new job, and buying a home.
But wait! Maybe you have a young son and he would have to change schools. Or maybe you would have to move away from your parents. There are other things to consider, but at least you’ll know that the numbers work out in your favor. Next time, I’ll show you a way to account for these types of “emotional costs.”
In the final analysis, if your analysis results in favorable benefit numbers, then take the risk. If your costs and benefits are the same or similar, then choose the one that you really want to do, knowing it won’t come at an extra cost. And if costs are much higher, then perhaps the risk isn’t worth it.
