There are two investment proposals – Alpha and Beta. Alpha projects 70% probability of 30% returns and Beta projects 95% probability of 15% returns on top of the original investment. Conventional wisdom would assess and support Beta as a safer choice. Conventional wisdom is conservative and risk-averse. The 30% possibility of losing money overshadows the incentive of higher returns.
Risk Aversion is a human behavior that factors into decision making significantly in the context of entrepreneurship.
Most people believe that Entrepreneurs are risk-seeking individuals running high on self-confidence. This assertion is true to some extent as individuals need some capability to seek risk to leave the comfort zone and take the leap of faith. However, this assertion is limited to the first step.
Most successful entrepreneurs are highly risk-averse. Any business has a significant number of unpredictable factors involved in planning, designing, and execution, making it a risky choice; successful entrepreneurs work hard to eliminate or mitigate the risks to reduce the probability of failure. While their actions seem radical at times, their movements are calculated and based on logic and reality. In fact, risk aversion is the main driver behind successful, lasting enterprises as they eliminate most causes of concern at the outset of any significant strategic movement.
Examples to follow in next post.