The result is predictable. Most people seek out low-risk, low-reward opportunities. And when they think they have found the Holy Grail - a low-risk opportunity with high rewards, everyone rushes to take advantage of it, diluting the results and raising the risks.
The 21 leaders we interviewed for How the Wise Decide have a better way: look for situations that seem to be both high reward and high risk. Most people consciously avoid these situations.
If a situation really is high risk, you can always walk away. But if you take the time to investigate, you may find that the risks aren't nearly as great as they appear, while the rewards remain high. If you can find an opportunity in which the risks aren't nearly as great as they seem, you can emerge a big winner. Here's how.
Identify what really drives the risk
Most of us let conventional wisdom guide our decisions. As a result, we extrapolate from inadequate data, let emotions overcome reason, and seek psychological comfort in following a herd mentality.
But those tendencies can be overcome. When you find what seems to be a risky situation, ask yourself two questions: What are the one or two key factors driving the risk? What information do I need to determine how dangerous that risk is?
When some of the junior analysts at Blackstone Group, a private equity firm, learned that a manufacturing company that Blackstone was considering acquiring dealt with deadly asbestos, they immediately recommended dropping the idea, as had other potential acquirers before them. But Steve Schwarzman, who with Peter Peterson co-founded the multi-billion-dollar Blackstone with just $400,000, was not afraid of asbestos. He wanted to understand it.
After some investigation, Schwarzman found that the asbestos in the company's products came in a sealed component supplied by another company. The substance couldn't get into the atmosphere and endanger anyone. And even if some enterprising plaintiff's lawyer wanted to use the company as a way to get into the massive asbestos litigation already underway, the supplier's insurance policy would cover any liabilities from past problems.
So it turned out that the deadly specter of asbestos that had frightened away other potential acquirers wasn't really a problem at all. Schwarzman decided to move ahead with the deal, and the acquisition turned out to be very lucrative for Blackstone.
Test the waters before taking the plunge
Not all business decisions need to be made quickly. Sometimes it pays to let a concept simmer, experimenting with an idea before committing fully to it. Experiments limit your downside risk, but not the upside reward. If the experiment fails, you will have minimal losses and have learned something. If the experiment works, you can refine concepts, learning as you go until you know the time is ripe for commitment.
As CEO of Starbucks in the 1990s, Orin Smith avoided the temptation to open drive-through stores for fear of having the Starbucks brand associated with fast food. But he did permit a few stores to try the concept on an ad hoc basis. The selected stores delivered some surprising results.
"When we dug into the numbers, they turned out to be the highest grossing stores we had," he told us. Using the experience of those few stores, his team figured out how store design, signage, and staffing all would have to change to make them work even better.
When he rolled out the concept nationwide, drive-through stores produced tremendous profits without impairing the brand at all. In the case of Starbucks, a small investment in an experiment paid huge dividends.
Create a risk-tolerant environment
It isn't easy to find opportunities in which what seems to be a big risk really is not. You need to enlist your entire team as a force multiplier for finding those opportunities. First, you have to create an atmosphere in which people believe they can propose high-potential ideas without being shot down or ridiculed.
Dean Kamen, a world-renowned inventor of lifesaving innovations like the portable dialysis machine, has a novel approach - frog kissing ceremonies. He derived the idea from the fairy tale about the princess who kisses a frog and turns it into a handsome prince.
Kamen is always looking for innovative, even outrageous, solutions to engineering problems so he periodically invites his engineers to submit their most imaginative ideas. From those, he picks the most outlandish, and in front of all the engineers, bestows a stuffed frog on the person who thought of it.
It's his way of telling everyone that it's okay to think big thoughts even if they don't work in the end. Sometimes you have to kiss a lot of frogs to find the prince.
You also need mechanisms that inspire your team to do their own rational evaluation of their ideas. Depending on your operation and the incentives you can introduce, you can choose one of the variety of approaches that have worked so well for wise leaders: bonuses for taking smart risks, extra time and funding for people to pursue their own ideas, uncapped upside potential, and, perhaps most important, a promotion system that rewards people for taking intelligent risks, even when the outcomes aren't good. Different approaches work for different business and cultures.
Ask, "What would it take?"
We all know the old maxim that "good is the enemy of great." We talk about it, but we don't do much about it. After all, good is easy. Great is not. But Shelly Lazarus, CEO of advertising giant Ogilvy & Mather, avoids that trap by asking her people, "What would it take to?"
When Lazarus wanted to spur faster growth in Ogilvy's public relations operation, she asked the senior managers what it would take to get there. They hesitantly told her that they needed to hire three new people, but quickly added that they knew there was no money in the budget for that.
Yet, when Lazarus questioned them, she found that they already knew who they needed and how much it would cost to get them. She approved the extra spending, the hires were made, and they rapidly moved Ogilvy's public relations operations into the top tier. Had Lazarus never asked that question, the PR department would have remained mired in its old slow-growth mode and would never have had the chance to become great.
"I want employees to be in a growth attitude so that they experiment," she says. "They have to always be taking a risk and they have to be okay with risk."
Don't fall into the loss aversion trap. Instead, pursue educated risks. Use these lessons to take educated risks, turning conventional thinking on its head and reaping the rewards of the opportunities that others miss.