Are You Correctly Weighing Opportunity and Risk?

By Marshall Goldsmith

As we go through each day, we unconsciously weigh the risks and rewards of our additions. We may decide to order the dessert, weighing the risk of eating too much against the joy of eating a lemon tart. We may weigh the reward of taking a shortcut to work against the risk of the traffic jams that can snarl that route sometimes. 

I once met a man, Richard, who met up with me some time after canceling a meeting with me. He mentioned that he regretted not having had the chance to profit from our friendship earlier, mentioned his “wasted years” and one big regret in his life. When he was young, he’d driven a taxi and after striking up a conversation with the young woman with whom he felt he’d had a real connection, he promised to see her again. But at the last moment, he canceled on the date — getting close to her home but backing up. He never saw her again, and has regretted it ever since. 

When Richard told me his sad story of not showing up for this first date with a wonderful young woman, I initially thought that his choice was inexplicable. But as I’ve thought about it over the years and discussed it with Richard, I believe I understand why he froze three blocks from his date’s door and turned around, never to see her again. 

Richard’s error was not the result of a sudden bout of stage fright or cowardice; those were the effects, but not the cause of his poor decision. His mistake was a failure to properly weigh the opportunity and risk that the first date was presenting to him. He over-weighted the risk, under-weighted the opportunity — and thus he missed his golden opportunity. 

In this unfortunate miscalculation, he was not alone.  We all do it. 

Opportunity and risk are the two key variables you should consider in any “investment” decision, whether it’s material resources or your time, energy, or allegiances. Opportunity represents the magnitude and probability of benefit derived from your choice. Risk is the magnitude and probability of cost incurred by your choice.

An opportunity-risk decision is more commonly referred to as a risk-reward decision. I believe that term is misleading because it improperly joins risk and reward: Do one, get the other. But where’s the risk if the reward is inevitable? I prefer “opportunity” because it more accurately describes what is at stake. 

The benefit of taking a risk is not the reward itself, but rather getting the opportunity to earn the reward. A risk is not foolish simply because we didn’t realize the anticipated reward. Other factors, far beyond our control, can negatively affect the outcome. When we take a risk, all we’re doing is choosing to seize an opportunity. The reward may or may not come later when our choices are heavily weighted in favor of either side of the opportunity-risk decision.

If we believe that our choice will almost certainly produce a big benefit with virtually no chance for loss, we will make it. If we believe that our choice will almost certainly provide a huge loss with no chance of gain, we will avoid it. 

Sometimes we’re worried about the risk. So we seek information that helps us balance the risk with the attractive opportunity. You check the weather and best time of year to fly to the Caribbean, for example. There are no guarantees, but you can choose in relative comfort. 

Sometimes the opportunity overwhelms the risk, and your only risk is failing to accept that a great opportunity has walked into your life. 

Let’s say you have the opportunity to buy 100 widgets at the distress sale price of $1 each. Because you follow the market for widgets very closely, you alone happen to know someone who desperately needs those 100 widgets and is willing to pay as much as $10 a widget for them. 

Unlike you, this customer doesn’t know that they can be had for $1 a widget. The customer’s ignorance in this instance is your edge. You buy the widgets for $100, sell them for $1,000, and pocket the difference—a 900% return on your investment. Unless the widget market collapses in the brief interval between your acquiring and unloading the widgets, this is as close to an all-opportunity, no-risk decision as you can make. 

This sort of thing happens thousands of times a day in bond markets and commodity exchanges. Someone believes pork bellies are underpriced, buys them cheaply, and sells them for a profit to someone else who urgently needs them (or believes you’re still underpricing them). It’s the sort of complex calculation, involving millions of dollars, that benefits from the backup of sophisticated software and high-speed supercomputers. 

You’ll notice that in each of these choices where money is changing hands, and where financial risk is incurred, there’s a system and infrastructure, in the form of powerful technology rapidly delivering historical data for calculating the balance between opportunity and risk, that improves your ability to make a good choice and avoid making a bad one. A lot of business decisions are made with that data-driven advantage; it’s better than over-relying on emotion or intuition. 

But in everyday life we don’t have the technology to help us weigh opportunity and risk when we’re choosing things such as whom to marry, where to live, when’s the right time to switch careers. We’re influenced by our memory of past successes and blunders, or by the opinions of others. 

But you can use the Triple A’s of Action, Ambition, and Aspiration to help you figure out what might work best for you. 

Aspiration refers to what we do in the service of a higher purpose in our life. It’s time horizon is infinite — we always aspire.

Ambition represents focus on achieving defined goals. It is time-bound, determined by how long it takes to achieve a goal. 

Action represents our activities at a specific moment in time. Action’s time horizon is immediate, forever in the now. 

The distinguishing characteristic of each variable for me is its time horizon. How far out from the present moment is each variable pointing? Is it minutes, years, or a lifetime? 

Distinguishing these three time dimensions and seeing how well they serve one another (or not), I believe, can have a marked influence on how close we come to living an earned life.

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