“Two roads diverged in a wood, and I—I took the one less traveled by, and that has made all the hbr_130x130difference.” The line is instantly recognizable as the conclusion of “The Road Not Taken” by Robert Frost. And, the misunderstood poem helps to highlight how innovation-seeking executives need to reframe the word risk.

Most readers assume Frost’s poem is hopeful, describing the value of the rugged individualism that has long served as an American hallmark. However, a measured reading shows a wistful tone that borders on regret (“I shall be telling this with a sigh”), with critics arguing that the poem’s key message is how we rationalize bad decisions after the fact.

Similarly, when the word risk comes out of an executive’s mouth, it’s usually accompanied by one of four mistakes:

Assuming that taking action is the biggest risk. In many cases, the riskiest action is in fact inaction. The pace of change in today’s world means that standing still leads to falling behind current and emerging competitors. The way in which many companies make investment decisions blinds them to this reality. Most executives know that the present value of an investment comes from projecting its cash flows and discounting those numbers into today’s dollars. The general rule is projects with positive net present values should get funded, and those with negative ones shouldn’t. That assumes, however, that the base case is zero. If doing nothing leads to decline, projects with marginal projections actually are better alternatives than inaction (this misuse of financial tools for innovation is discussed in depth in a 2008 Harvard Business Review article by Clayton Christensen, Willy Shih, and Stephen Kaufman).

Believing that good entrepreneurs seek out risk. They don’t. Good entrepreneurs recognize the inherent risk of creating new businesses. After all, it’s well known that most new businesses fail, and that most of the ones that succeed do so in modest enough ways that the entrepreneur gets at best a modest financial return on his or her effort.

Read the full article at Harvard business review

0 comments on “4 Assumptions About Risk You Shouldn’t Be Making

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