12 Feb The Untruths about the relationship between Entrepreneurs and Risk
“I couldn’t do what you do, I couldn’t be an entrepreneur. I don’t have the appetite for risk.” This statement is made regularly to brave few that are put on pedestals when they have taken the plunge and left the security of a job to venture into the unknown world of starting a business. However, there is a major fallacy in the perceived appetite for risk that entrepreneurs are believed to possess.
The little-known truth is that the majority of entrepreneurs have a low appetite for risk and according to Luca Rigotti and Mathew Ryan in their paper that explores a model for quantifying risk and it’s translation into entrepreneurial activity, the results were very interesting. Risk is explained as taking action where the outcomes are unpredictable as well the factors leading to that outcome are unknown. Entrepreneurs themselves, if asked, do not deem themselves risky people but rather that they don’t need to know everything to exploit and opportunity. Theorists deem this a tolerance for ambiguity.
In simple terms, entrepreneurs don’t go headlong into the shark-infested water because they like the idea of danger and potentially being eaten alive or the thrill of being able to say that they survived whilst others perished in a pool of maimed flesh. They carefully calculate that the sharks have been fed recently, some of the sharks are ragged tooth sharks that whilst looking like they are set to devour a human being, are actually incapable of opening their jaws wide enough to bite. For those sharks that still have space or who smell blood and can’t resist the urge to kill, the entrepreneur has a cage set up that he can retreat into quickly and a knife with which to protect himself.
Tolerance for ambiguity is the careful evaluation of what is known at the moment where a decision must be made and an open-mindedness for what is not known. This, coupled with the agility to change course when new information is presented, has earned the label of high-risk appetite. The appetite is not for the risk, but it is the ability to move down a path, when all the information is not known.
I likened it to a person moving around in the dark holding a candle. The candle casts a light that illuminates a limited parameter around the person holding the candle. What is beyond the light that the candle casts, is unknown and potentially a risk. But as the person moves forward, the light reveals what was unknown and in the shadows. As the light reveals new information and new challenges added to what they have already learned, the person can make better-informed decisions. The tolerance is in not knowing what lies in the shadows yet to be illuminated by the candle and then the confidence in his or her own ability to act on what new information is discovered.
None of this behavior is risky or irresponsible. There is careful consideration of what is known and a tolerance for what is unknown. And once there is more information available, a calculated next step is taken and more information is assimilated into what is now known. This is the true relationship between entrepreneurs and the apparent illusion of risk.