· Chapter Five ·

FACE FEAR BY REDUCING RISK

There is only one thing that makes a dream impossible to achieve: the fear of failure.

—PAULO COELHO, The Alchemist

Fear can be our biggest and worst enemy. It limits our ability to realize our dreams and keeps us trapped in our everyday lives. The fears that hold us back are big, emotional, and often disconnected from the realities of our actual situation.

Beth is an example of someone who faced unfounded fears about unlikely outcomes when she first considered starting her own business. Beth had been working at a medium-sized firm in leadership development for a decade. She was successful in her job and had built up an excellent portfolio generating revenues for the business and delivering results for clients. But when she started seriously flirting with the idea of starting her own company, she hesitated. Despite all her resources and qualifications, Beth was afraid of failing. Beth is a professor and a sharp businessperson. Those who know her would characterize her as highly intelligent and powerful. And still, there she was, caught up in her fears. As Beth said, “The worst-case scenario is that I’m homeless somewhere with no money.”

Why does fear have such a stranglehold on our lives? Why does it hold us back and keep us small even when the opportunity for something bigger and better lies right in front of us? One reason is that we let our fears fester and grow, unchallenged, in our heads. We don’t examine them in the cold light of day and see what they’re made of. Another reason is that we are loss averse. We feel the pain of loss much more than the pleasure of gain. We pay greater attention to potential losses than gains, and we’re inclined to avoid possible setbacks more than we are to seek potential wins.

Facing Fear

It’s easiest to deconstruct our fears and identify our risks if we see them in front of us. Let’s return to the example of Beth and evaluate her fears of being homeless with no money. Beth had savings and owned a condominium with some equity. At the time, she was single, so her expenses were relatively lean. She was a good candidate for a job in her field, had a strong network of contacts, and had excellent client references. She had an emotionally and financially stable family and a group of local friends.

Beth would have to fall through a lot of safety nets in her life to end up homeless with no money. Life can be harsh, and we could probably construct a scenario in which it could happen, but it would be a highly unlikely one. As Beth noted, for her worst-case scenario to happen, “All my family had to be dead. All my friends had to be dead. There were a whole of things that had to go wrong all together for that outcome to happen.” We all have fears like Beth’s that, on examination, are more smoke than fire.

Face Fear by Starting with the Worst Case

Our fears are usually big and emotional, and the best way to start facing them is to start with the worst-case scenario. Start with what scares you the most.

Fear

I’ll be homeless

I’ll have no money

Once it is written down on paper, it becomes easier to more objectively evaluate it and question: How likely is this to happen? If it’s likely, can I live with it? Can I recover from it? Are there actions I can take to prevent this scenario from happening?

Face Fear by Identifying Specific Risks

Once you’ve named your big, emotional, and vague fears, start to identify the specific, concrete risks that would have to manifest for this worst-case scenario to come true. What often happens in this phase is that you begin to understand the extremely unlikely events that would have to occur for your fear to be realized.

Face Fear by Assessing How to Reduce Your Risk

The final step is to develop an action plan to reduce the risks that you can control. You can decide later whether the risks are large or likely enough to warrant taking preventive action, but even having the option to take action can help reduce fear.

The goal of this exercise is to take our big, vague, emotional fears, separate out the concrete risks, and develop a plan of action. Beth’s case illustrates that her worst-case fears are unlikely given her situation. That’s not uncommon, but sometimes our fears are rooted in likely outcomes. In those cases, this exercise can be very helpful in identifying actions you can take to reduce risks.

It’s possible that after completing this exercise, you’ve come across risks that are too big for your personal risk tolerance, even after you attempt to deal with them. In this case, you may want to consider modifying or restructuring the thing you want to do so that it’s smaller and less risky. For example, maybe after completing this exercise you determine that you really aren’t in a good financial position to start your own business. If so, can you still move forward with your plan if you start building your business on the side? Starting it as a side gig would help you increase your income, begin to build a client base, and save some money. Or, what if you plan to start your business 12 months from now, to give yourself time to improve your financial condition? During that year, you’ll have time to plan, refine your model, earn extra income, save money, and reduce your expenses before starting your business.

This exercise works with any decision you’re confronting and with both personal and professional fears. It’s an effective way to help you work through decisions like moving cities, changing jobs, getting married, buying a house, and whether or not to go skydiving.

Reducing Risk

The key to facing our fears is breaking them down into their component risks. Risks are concrete and specific, and once we’ve identified a risk, there are several options for evaluating it and dealing with it. Below are six possible options for dealing with risk. As you break down your fears into their underlying risks, consider each of the options below:

Reduce Risk by Mitigating It

If the risk you’re contemplating seems too high for your personal risk tolerance, you might be able to mitigate it. For example, John works full time at an accounting firm whose clients are medium-and large-sized businesses. If John’s employer goes out of business, John’s income would go from 100 percent to 0. John is uncomfortable with that risk, so he has developed a side business working with entrepreneurs and small businesses, helping them with their bookkeeping, financial statements, and taxes (these clients are not competitive with his employer). The side gig mitigates his worst-case scenario by giving him an income cushion. If he unexpectedly got laid off, his income would go from 100 percent to 30 percent, thanks to his existing client base. If he had a month or two of notice that he was being terminated, he could likely ramp up his side business by actively seeking new clients. He might be able to limit his downside to a reduction of 50 percent of his income. Having the side business allows John to limit his risk of having no income if he gets laid off.

Reduce Risk by Insuring It

If there’s an unlikely but terrible outcome that has you worried, see if you can insure it. We insure our risks all the time through health, disability, and home insurance, but there are many other, less-common forms of insurance for specific situations. If you’re afraid of taking that once-in-a-lifetime family safari to Africa because you’re worried you’ll get sick and be unable to get medical care, then look for travel insurance that includes medical evacuation. If you’re retiring and planning to sit on some corporate boards of directors, make sure they cover you with directors and officers (D&O) insurance to protect you against lawsuits brought against the company and its directors. If you want to try your hand at working and living on a cargo ship but the thought of Somali pirates keeps you up at night, some kidnapping and ransom (K&R) insurance should calm your fears (and increase your odds of getting out alive).

Reduce Risk by Shifting It

Sometimes you can reduce your risk by shifting some or all of it onto another person or organization. Full-time employees shift the risk of income volatility to their employer because employees get paid a fixed amount every two weeks regardless of the company’s actual revenues, profits, or performance. Of course, in the medium term, the company can lay you off or fire you, but in the short term, the risk is higher for the company. Small business owners, in contrast, bear this risk themselves.

In the Gig Economy, we’re seeing a big risk shift from companies to workers. Companies are hiring fewer full-time employees. Instead, they hire more contractors, consultants, and on-demand workers, who each take on the risk of volatility in demand for their services and variability in their incomes. Ways to shift economic risk back include signing fixed-price or fixed-length contracts in which your income is guaranteed so long as you fulfill the conditions of the contract, or creating retainer relationships with clients, where they pay you a fixed price in advance each month, for variable work to be specified.

Reduce Risk by Eliminating It

There are some specific situations that allow us to eliminate risks entirely. If you’re a contractor or consultant, you can eliminate the risk of not getting paid for a project by negotiating a payment schedule in which you’re paid in advance. Contracts are also useful to eliminate risk. If you have an employment contract, you have some comfort that you won’t be let go without a specified amount of notice and a fixed amount of severance that you’ve agreed to and can plan around. Contracts can eliminate the risk and uncertainty around identifiable scenarios by negotiating the outcomes in advance.

Reduce Risk by Accepting It

We regularly accept risk in our lives because most activities involve some degree of risk, even if it’s remote. We make reasonable trade-offs about the size of the risk and the probability that it will occur compared to the rewards we expect from pursuing the activity. How much risk we’re willing to accept depends on our personal risk tolerance. Heli skiers and skydivers are willing to accept relatively higher levels of risk for the thrill of pursuing those activities. Most of us are willing to accept low levels of risk in our daily lives. We eat out in restaurants, even though there’s a chance of food poisoning. We go swimming, even though we could drown, and we take buses and trains that have some small chance of crashing.

Be aware that our levels of risk seeking and risk aversion can vary by situation. I might enjoy racecar driving but be averse to investing in the stock market. I can be both risk seeking in some areas and risk averse in others, so the levels of risk I’m willing to accept can vary as well.

Complete steps 1 through 3 on your own, and then walk through the exercise with someone else. It’s most useful to work through the exercise with someone who can help you look more objectively at your fears and risks. Ideally you would complete this exercise with someone who has already been through or experienced the thing that you’re contemplating, Someone who has been there, done that, will be in the best position to draw on her own experiences to help you break down your fears and make a plan to reduce your risks.

Consider the Risk of a Boring Life

There are risks associated with every action. But equally important to consider are the risks of inaction. It’s important to ask ourselves: What is the risk of not taking enough risk? What is the risk of living too comfortable, too secure, too stable a life? What if we play it too safe and fail to grow, fail to thrive, fail to even try to pursue our dreams? Which is more frightening to contemplate: the risk of failure or the risk of regret? The risk of a loud crash and fall, or the life of quiet desperation?

Amber Rae is a blogger, artist, and entrepreneur who encourages us to take risk, “to invent new careers, act on ideas and create a life that drives [us] forward.” She humorously summarizes the risks of a life of inaction in a fake book title: Be Mediocre: The Ultimate Guide to Climbing the Corporate Ladder, Asking for Permission, and Living a Boring Life.¹ There is such a thing as living a life that is too safe.

What would you want the book about your life to be titled?

See Your Blind Spot

As you work through the previous exercise, it can help to do some research and data gathering about the probability and likelihood of various risks. Having facts and figures to quantify some of the risks will give you the information to accurately assess their probability. That information alone could help reduce your fears. For example, Beth might have in mind that over 75 percent of small businesses fail, and that probability contributes to her fear of starting her own business. But if she researched that assumption, she might find that (for example) 90 percent of restaurants fail after a year and 80 percent of retail establishments go out of business but only 30 percent of professional services firms fail in the first year. Just having better information can help Beth overcome some of her fear.

We’re not very good at assessing our fears and risks accurately. Our assessment of risk is distorted by a series of cognitive biases like overconfidence (which researchers implicate in gambling), anchoring (we assess gains and losses depending on how they are framed), and loss aversion (we hate losses more than we love equivalent gains). These cognitive biases can cause us to either overestimate or underestimate risk and make (sometimes big) decisions based on our inaccurate perception.

We tend to hold unfounded fears about events and outcomes that are unlikely yet seem oblivious to the very real risks in our everyday lives. Driving is an excellent example of our inability to accurately assess risk. Automobile accidents are the leading cause of death for teenagers and one of the top 10 causes of death in the United States. Cars are the third most dangerous mode of vehicle transport (behind motorcycles and bikes). An average 20- to 30-minute commute by car each way has been associated with increased obesity, depression, anxiety, and social isolation. Yet few Americans would identify daily driving as one of the riskiest activities they pursue, even if the data is clear about the dangers. Every day we fearlessly take significant risks. This means that we probably have more risk in our lives than we would comfortably take on if we could see it clearly.

Our evaluation of risk is also influenced by emotions and personal experiences. Many of my MBA students who watched their parents get laid off or downsized after several decades at a company believe that working for themselves or starting their own business provides more job security and is lower risk than a corporate job. Yet there are just as many students who grew up in an entrepreneurial household who believe exactly the opposite: that self-employment and startup life is risky and financially volatile and that the safe, fiscally conservative choice is to get a traditional job.

When we don’t assess risks accurately, we can end up taking high risks (driving our car to the grocery store) for low rewards (food shopping). We take on too much risk because we experience too little fear. Or, even worse, we miss out on potentially high rewards (fulfillment, contentment, happiness, wonderful memories) because we mistakenly avoid activities that seem high risk (quitting a bad job, taking that family safari, having that third kid). We take on too little risk because we have too much fear. In both cases, our inability or unwillingness to accurately assess the fears and risks we’re facing causes us to make suboptimal, or even inappropriate, decisions. By breaking down and analyzing our risks and gathering information, we can be more accurate and explicit about which risks are worth taking.

Learn to Be a Better Risk Taker

Some risk taking in our lives is necessary, healthy, and required for growth. While we should make every effort to avoid destructive risk taking—like smoking or driving drunk—positive risk taking is necessary to progress in our lives. Moving out of our parents’ house, starting a new job, accepting a promotion, making a new friend, learning a new skill, or relocating to a different city can all help us grow, gain confidence, and open up new opportunities. Positive risks expose us to the possibility of failure, but without taking those risks, we won’t grow. There are ways we can learn and practice to be better risk takers.

Take Small Risks

Take baby steps. Start small. Increase your risk tolerance by taking smaller risks first, and then slowly increase to taking larger risks as you feel comfortable. If taking a year off seems too risky to you, start with just a month off. If you’re afraid to move across country, start by visiting for a few weeks or agreeing to spend a month in the West Coast office to try it out. In their research on risk, Norris Krueger Jr. and Peter Dickson of Ohio State University found that engaging in small doses of risk-taking behavior is an effective way to increase our confidence, which, in turn, increases our risk taking.²

Take Safe Risks

Adopt a framework of taking safe risks that have limited downsides. Getting a new haircut is an example of a safe risk because the downside is limited to looking a little less fabulous during the time it takes your hair to grow back. In the Gig Economy, part-time side gigs can offer a way to take a safe risk. If quitting your job and working for yourself seems too risky, a part-time side gig offers the potential to learn more about the opportunity before you commit fully and test if you can generate revenue and get customers. If it doesn’t work out or you hate it, you lose the time, energy, and cash you allocated to invest in the gig, but you’ve avoided the bigger loss of your job.

Expect and Prepare to Fail

Researchers at New York University found that giving ourselves permission to fail can make us better risk takers.³ Participants in their study were told to pretend that the gambling task they were given was something they performed every day and that losses were not only acceptable but to be expected. Those participants outperformed their peers who weren’t given those instructions. The students that were given permission to fail took smart risks, and they worried less when they were told to expect losses. The researchers concluded that good risk taking can be taught by helping students to build up a tolerance for risk.

We can see this effect in the entrepreneurial ecosystem or in places with high levels of entrepreneurial activity and a risk-taking culture, like San Francisco and Boston. When failure is expected and culturally accepted, people become more comfortable, more frequent, and better risk takers.

Plan for the Best-Case Scenario

Sometimes we spend so much time focused on the downside (our fear rearing its ugly head) that we don’t spend enough time contemplating the upside. Of course it’s prudent to have a financial cushion and a plan if your new business fails. But what if it wildly succeeds? Are you prepared for that? Do you have a short list of the team members you’d like to hire, the financing you’d need to get, the high-profile customers you’d target?

Once you’ve gone through this fear and risk exercise and made your action plan, turn your attention to how you’ll handle success. What’s your best-case scenario? How likely is it to happen? What factors could cause it to happen? How would you need to react in the short and medium term? What resources would you need? Spend time imagining your success. Hopefully that’s the action plan you’ll need.

FACING FEAR AND REDUCING RISK IS
THE NEW COMFORT ZONE

The Gig Economy offers plenty of opportunity and potential rewards but also higher risks. There is more job insecurity, income variability, and change in the Gig Economy.

To make sure that we don’t let fear keep us from pursuing a career or life that could bring us the highest rewards, consider:

What are my fears and the worst-case scenarios I worry about?

Have I identified, evaluated, and developed an action plan to reduce the risks associated with my fears?

How can I practice and learn to be a better risk taker?

Have I planned for the best-case scenario?