I’m sure you’ve asked yourself “What’s the worst thing that could happen?” many times. But did you also answer it? I mean really answer it, after analyzing possible and probable future scenarios?
I’ve found that this question can mitigate the risks associated with both action and inaction bias. It can even give you a roadmap for all the actions you need to take to achieve [desired outcome].
Hear me out.
I know a lot of people refrain from this question. Their argument is valid: when you ask yourself what’s the worst that can happen, you automatically let your fears run rampant and prevent you from taking action.
But what if you use it to get comfortable with uncertainty? To identify and mitigate risks as you go?
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A straightforward definition of risk
“Risk means more things can happen than will happen.” Elroy Dimson
This is one of the best definitions of risk I know because it addresses the probability distribution of future events.
Let’s look at it this way: if only one thing could happen, what risk are you really taking?
This reductionist view allows you to zero in on the worst and best possible outcomes. Say you’ve got 100K to invest in an ad campaign promoting your recently launched product.
The best possible scenario is a 1000% ROI from that campaign. Congrats, you’re a millionaire now!
The worst possible scenario is that it fails completely and you will have lost 100K (plus the money you invested to build a new product).
In real life, however, things are more nuanced. There are hundreds of possible scenarios that can happen and most of them lie between making 100 million and losing 100K+.
When more things can happen than will happen, uncertainty increases. Oftentimes, uncertainty paralyzes us more than fear. So how do we deal with it?
In a memo to his customers, American investor Howard Marks offers an interesting solution:
“The future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution.”
The world is complex, unpredictable, and filled with events you can’t possibly anticipate. Remember the pandemic?
This is why adjusting your strategy as you go and as more information becomes available is the key to getting closer to the best possible thing that could happen and farther from the worst possible thing that could happen.
Enter the Bayesian theorem.
Strategies don’t live in a void. They need constant updating
In Superforecasting, Philip E. Tetlock and Dan Gardner offer the most useful interpretation of Bayes’ theorem I’ve ever seen:
“Your new belief should depend on two things — your prior belief (and all the knowledge that informed it) multiplied by the “diagnostic value” of the new information.”
In the authors’ view, Bayes’ core insight is that you get closer to the truth by constantly updating your beliefs in proportion to the weight of the evidence.
This is a good framework to describe not only the inexorable search for the truth but also strategy building and updating.
Why focus on the bad?
Isn’t that, you know, bad? Mindset coaches may tell you to look at the good alone. But ignoring half the possibilities of the future isn’t quite rational, is it?
Unpredictable as it may be, the future holds only one event that will occur. You don’t know if it’s a bad or a good one yet.
When you answer the uncomfortable question “what’s the worst that can happen?” you find out if you can get comfortable with that outcome, even if it only has a 0.1% chance of happening.
Consider the best/worst dichotomy as two possible (albeit improbable) occurrences. Then use the Bayes theorem to gradually steer clear of the latter and get closer to the former.
As new events unfold, adjust your strategy and your beliefs to match your desired outcome. Just like a captain steers his ship according to wind speed and direction, you can steer your business depending on what the economic and social context throws at it.
Don’t worry; you don’t have to do all the steering at once. In fact, you can’t do it. Nor should you try.
Time amplifies the magnitude of seemingly small choices
Time also turns small steps into giant leaps.
Excel at small choices. They compound with time, leaving you in a better position to succeed.
Spending $100 on a foolproof marketing strategy might not make you a millionaire in a single day. But if you do this consistently over a couple of months, it will put you in a position to spend more and more until you become a millionaire.
Conversely, spending $100 to try a new marketing strategy won’t make you go bankrupt. Doing this thrice a day might.
Most companies that reached 7+ digits didn’t do so overnight or through a single choice, but through the compounded force of a series of small choices. This snowball effect is easy to miss even when looking back at your own achievements.
In business, as in life, most giant leaps are made up of tiny steps.
Tiny steps take you closer to the best possible outcome and farther from the worst possible one — the sensible way to manage risk and uncertainty.
How to apply this in your business: always quantify your risks
Have you ever found yourself admiring an entrepreneur for a risk they took and that paid off massively? Back in 2012, Mark Zuckerberg went against the advice of his board of directors and bought Instagram for a whopping $1 billion.
At the time, a lot of analysts called Zuckerberg reckless and questioned his business acumen. But the risk he took paid off — Instagram became Meta’s cash cow.
This is an example of the best possible outcome happening. However, as I’ve written before, best possible outcomes rarely happen; we just tend to see more of them in the media.
But I digress.
Let’s look at this story from another angle. $1 billion is a lot of money by any standard. But exactly how much was it for Meta (Facebook at the time)?
2012 is also the year when Facebook went public. It did so with a record-breaking IPO, the first US company to go public at an initial valuation topping $100 billion.
In other words: Mark Zuckerberg risked less than 1% of his company’s value. While this doesn’t mean that Facebook had $100 billion in the bank at the time, it puts things into perspective.
For most companies, a $1 billion purchase comes with a bankruptcy risk. For others, it’s a relatively safe shopping day.
Today’s lesson is: quantify your risks and weigh them against your own risk appetite and your own financial profile.
Can you deal with losing $1 billion dollars? If not, start smaller.
Using critical thinking to answer “what’s the worst thing that can happen” has two potential outcomes:
- It makes you comfortable with a bad outcome. You’ll be better equipped to deal with the consequences if your small or big choice turns out to be wrong.
- It opens you to the possibility that the worst thing isn’t as bad as it seemed back when it was sheer uncertainty.
Should your (careful!) analysis of the worst possible outcome conclude that it’s a manageable one and that you can take the plunge, be ready for the consistency of effort it requires. Don’t sit still waiting for the perfect time to leapfrog. Take small steps away from the worst possible outcome and towards the best possible one.
This is it from me today. See you next week, at the same time, in the same place (your inbox).
Here to make you think,
Adriana
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