The Five Traps of Project Risk Tolerance


A good friend of mine is waiting for his big break.  He has been for over thirty years now.  I hope he finds it.  Even though I do not know if he will.  He has been chasing his dream of hitting it big in the business world.  Once in the media business, then in the food industry, and then in mining, and on and on.  He is very colorful and sure has lots of entertaining stories to tell about his endeavors.  I really like him a lot and hope he finally gets what he is looking for.  However to date none of these endeavors resulted in hitting the “Jackpot.”

The problem is not the hope that he has, but that he has nothing but that hope.  He refuses to take jobs that bring in money less than the dream jackpot.  So he ends up doing nothing, but look for these jackpots.  He scuffs at the small opportunitites he gets.  He will not get a steady job, do a small project, and even find a way to get that extra thousand to cover household needs.

The problem with chasing “Jackpot” projects is that they usually carry a high level of risk.  That is not a problem if you can tolerate the risk involved.  For example, If one invests a million dollars in a project that has a 10% probability of success,  that might be not too much risk, if it involves putting them in debt beyond their abilities.  But for others it might be small change.  My friend has a problem with risk tolerance.  He borrows money from friends for his adventures and he loses and cannot pay back.  This scares me as I know I can fall into this trap very easily as would anybody if one succumbs to the temptation of the “jackpot” if the project works.

So as not to make this an Ammar rambling session, here are some tips I learned from life, sometimes the hard way, on how to deal with these jackpot opportunities:

1. Follow your thinking through, do not stop at the value of what you got, think about how you will get the value translated into dollars.  For example, a good friend of mine once had a great deal on stock electrical inventory worth around half million dollars retail, and he got it for around fifty.  He was estatic and already started thinking about how he will spend the easy money he will make.  However, he hit a brick wall when he could not find an outlet to sell his electrical fixtures.  Electric supply stores are used to buying from specific suppliers with specific requirements of maintenance, warranty, and support that he could not offer.  He could not put an add in the paper and sell a piece at a time.  So, he ended up selling the whole lot to another entrepreneur at a discount

2. Ask your self “why take the risk?”  sometimes it is not worth it to take the risk altogether.  Sometimes, the opportunity is 90% successful, however, if the 10% happens God forbid, you might lose your savings.  Why would you do such a risk? While the probabiliy of failure is low, the consequences are drastic.  So, even with high odds, sometimes you have to walk from the opportunity.

3. Be optimistic but also calculate the pessimistic scenario.  We all love an optimist, and we need to be optimistic, but ask yourself what is the pessimistic scenario? look at that scenario and determine if you can live with it.

4. Cut your losses and abandon sunk cost.  Sometimes we refuse to accept the fact that we made a bad decision, and continue from it to another bad decision in hope that the next risky opportunity will help us recuperate from the first mistake.  The result is a bigger mistake.  If you are wrong admit it, cut your losses, and move on to something else.  sunk cost is money already committed into a project and cannot be recovered.  Sometimes, because of how much sunk cost we put into a project, we refuse to let go:”I already spent x dollars on this project, I cannot stop now.”  Well, usually NOW is the best time to stop.

5. Be clear with partners about the risks.  If you do not share the risks with your partners you carry the whole burden of the risk.  This puts a lot of pressure on you.  Be clear about the risks you have to take with the ones who are affected by it.  The more candid you are the better advice you will get and the more comfortable you will be with the risks you take.

Speaking of Jackpots my dad always says, you cannot win the lottery if you do not buy a ticket.  However, of millions who wasted there lives wising for that jackpot, very few have actually hit it.  So, while I think it is OK to dream of the “big thing” but do you want to spend your life dreaming of such odds? The problem comes when you build your whole life based on these odds and do nothing else.

Even veteran entrepreneurs and project managers fall once in a while into one of these traps, so if you do, do not despair, move on, and take with you the lessons learned and make sure you share it with others.

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