A better way to think about risk

Risk assessment is a double edged sword

Few people would question the value of risk assessment. Without it, we would plunge thoughtlessly into situations that could lead to considerable harm. But upon closer inspection, risk assessment is itself a dangerous double-edged sword.

There are numerous counterexamples where, at least in hindsight, even a simple assessment of risk would have killed a business idea that turned out later to be a huge success. The launch of Facebook, for example, might not have been justified when MySpace and Friendster were industry leaders.

So is there a better way to think about risk, especially in fast-changing environments? I suggest three:

1. Understand how the brain processes risk. Recent evidence from brain science suggests that we need to reframe how we think about risk and that we need better tools for assessing it. While we all have biases that make us underestimate risk, and we need to take those into account, new research suggests that there is even more going on than we thought.

Risk-taking may be conscious or unconscious. When it is unconscious, you may not be aware of the risk or how you are framing it. In this case, doing a risk assessment limits your conclusions to conscious factors, thereby excluding the potential impact of unconscious biases.

Risk assessment may also be driven by feelings. Feelings can obscure important rational thinking or they can promote it. Even if we’re conscious of our feelings, how are we to know which effect they will have when we’re facing a big decision?

Furthermore, whether you take a risk or not may be entirely based on your personality. Research has shown that people who are sociable, impulsive sensation-seekers or aggressive may be especially likely to take risks. So assessing a situation and its risks are not enough. You also have to assess the final decision on your propensity to take risks based on your personality.

2. Remember that risk-taking can be a good thing .“Risk” often has inherently negative connotations, which may bias you against taking smart risks. So make a conscious effort to remember that risk-taking may be adaptive and may even lead to positive outcomes. Steve Jobs taking a big risk to open up Apple retail stores despite physical storefronts being a risky business for computer manufacturers illustrates that a sober risk assessment is far from the be-all and end-all of decision making.

3. Learn to become an expert at bouncing back from failure. Many people who have failed due to taking risks have subsequently succeeded. The brain is rigged for error-based learning, so why shouldn’t we become better at experimenting rather than trying to avoid failure through risk assessment? Steve Blank, whose company Rocket Science Games was supposedly going to revolutionize the video games industry, lost $35 million in funding. Instead of quitting, he went on to start another company, E.piphany, which resulted in each of its investors making $1 billion.

Even though failure is a badge of honor in Silicon Valley, there are plenty of people who fail in launching new businesses and fade from the scene completely. What makes one person different from another? In large part, it’s resilience and openness.

The message here is that in our rapidly changing world, our traditional way of thinking about risk assessment is inadequate for business strategy and decision-making. More than ever, learning new techniques and tools will help us achieve better outcomes in this era of dramatic and disorienting change.

(Dr. Srini Pillay is the CEO of NeuroBusiness Group, an assistant clinical professor at Harvard Medical School and teaches in the Executive Education Program at Harvard Business School.)

© 2014 Harvard Business School Publishing Corp. Distributed by The New York Times Syndicate