With a little tweak to your thinking, you can create a life that channels risk-taking into productive, fulfilling pursuits—without risking everything in the process.
Frans Johansson tells this story in his illuminating book, The Click Moment.
In the early nineties, something called a Cypres device became standard issue gear for skydivers. The Cypres eliminated “no-pull” or “low-pull” deaths. These types of accidents are exactly what they sound like—deaths resulting from divers pulling the cord too late or not at all. The Cypres opens the parachute automatically if the diver is seconds away from impact.
Great innovation right? In fact, in 1998, Cypres devices recorded 12 “saves” and there were no low-pull deaths that year. In 1991, before the Cypres penetrated the market, there were 14 deaths. The technology of the Cypres worked to make skydiving safer.
But people were still dying during skydives. And in roughly the same number. What was going on?
The answer is that deaths from risky landing maneuvers increased almost exactly to offset the lives saved from the Cypres device. With the risk of low-pull and no-pull accidents virtually eliminated, skydivers began executing dangerous hooking and swooping techniques as they landed. These techniques led to deaths when they weren’t executed correctly.
Risk homeostasis is a concept from psychology. It says that humans compensate for decreases in risk in one area of life by increasing risks in another. The Cypres device practically eliminated the risks of parachute malfunctions—so skydivers compensated by trying to get themselves killed in other ways.
Not all of us are skydivers. But we all do experience risk homeostasis.
In his 2001 book Target Risk, Gerald J.S. Wilde argues that we each have our own level of acceptable risk and that our actions tend to keep us at that acceptable level. If the weather is good, you drive faster. If the weather is bad, you slow down. The risk level of a driving accident stays roughly the same.
This hypothesis, if true, explains a number of interesting phenomena. It might be why drivers with antilock braking systems (ABS) seem to take more risks while driving. Or why American football players, with their space age helmet-and-pad technology, suffer more serious injury and concussion than players of the comparable sport of rugby, a competition with no such protection.
Risk homeostasis might also explain why folks with cushy and “safe” corporate jobs do risky things with their money, like finance expensive cars, pay upwards of $100,000 for questionable degrees, and sign up for thirty-year mortgages. The risk has to go somewhere. Society-sanctioned ones happen to carry less social stigma. But they’re not inherently less risky.
The agile person has to learn where best to direct that risk. It would be easy to live the autopilot lifestyle, taking societally acceptable risks and settling for mediocrity and the illusion of security.
But are these handful of risks really the only ones worth taking? And what happens if these risks don’t pan out, like they didn’t for millions of people during the 2008 financial crash?
What are you left with?
When “Keeping Your Options Open” Is an Illusion
As VC partner Randy Komisar shows in his book, The Monk and the Riddle, the risks inherent to a conventional 9-to-5 lifestyle are very real, if difficult to quantify:
[T]he risk of working with people you don’t respect; the risk of working for a company whose values are inconsistent with your own; the risk of compromising what’s important; the risk of doing something that fails to express—or even contradicts—who you are. And then there is the most dangerous risk of all—the risk of spending your life not doing what you want on the bet you can buy yourself the freedom to do it later.
As Komisar relates to author Michael Ellsberg (no relation to the creator of the Ellsberg Paradox) in The Education of Millionaires, many people procrastinate on creating a fulfilling life in the name of “keeping their options open.”
But keeping your options open is an illusion.
“People feel like, unless they’re affirmatively making a decision, they’re not making a decision. They think, ‘How can you fail if you’re not making any decision, not cutting off any possibilities?’ The reality is, you’re making a decision all the time. You’re making a decision not to follow a path that might lead you to fulfillment,” says Komisar.
“Even though the choice to do something you don’t love, to ‘keep the options open,’ may seem like a passive decision and therefore less risky, you can’t pretend you’re not making decisions. So the real question is ‘What risks are you taking by those decisions you’re not making?’”
As human beings, we overestimate our ability to pivot in the future. We think that we can work a soul-crushing, energy-draining job for another ten years and then switch to something more fun/socially conscious/valuable down the road. Like it was nothing.
We forget that comfort is seducing. That change is hard. That after marriage, kids, and mortgage payments, we might forget our dreams and our passions.
This is surely the path to midlife crisis. No one wants to be in their mid-fifties wondering whether they’ve wasted the prime years of their life doing grunt work for a paycheck.
The risk of regret is the single biggest unacknowledged risk of living a mediocre life. Click to tweet
In Poke the Box, Seth Godin puts it this way:
Those who fear risk also begin to fear movement of any kind. People act as though flux, the movement of people or ideas or anything else that’s unpredictable, exposes us to risk, and risk exposes us to failure. The fearful try to avoid collisions, so they avoid movement.
These people have made two mistakes. First, they’ve assumed that risk is a bad thing, and second, they’ve confused risk and flux, and come to the conclusion that movement is a bad thing as well.
So if I’m right about what I’ve written so far, it seems like we’re all caught in a catch-22:
We don’t want to forego our passion and purpose to live a mediocre lifestyle that funnels our risk-taking into conventional avenues like financing cars, houses, or education.
But at the same time, how many of us have the stomach to risk it all on some flashy entrepreneurial venture that could crash and burn, leaving us destitute and out on the street?
Which would you choose?
Or is there a way to thread the needle?
What’s Your Affordable Loss?
In the landmark paper “What Makes Entrepreneurs Entrepreneurial” by Professor Saras Saravathy of the Darden School of Business, Saravathy first sets out the Affordable Loss Principle.
Saravathy argues that expert entrepreneurs see opportunity differently than the rest of us, and they grasp this difference intuitively: “Expert entrepreneurs limit risk by understanding what they can afford to lose at each step, instead of seeking large all-or- nothing opportunities. They choose goals and actions where there is upside even if the downside ends up happening.”
What I’ve bolded in the quote above is the essence of the Affordable Loss Principle.
Saravathy’s expert entrepreneur asks herself the following questions:
- Is the potential loss from a failed project affordable?
- Am I put in jeopardy if it fails?
- Could I survive to try it again if it does fail?
The Affordable Loss Principle is important because ROI is difficult, if not impossible, to calculate at the outset of a genuinely new venture. It’s much easier to think, “How much would it cost me if this project turned out to be a complete loss?”
As Frans Johansson discusses in The Click Moment, when Amazon launched the Kindle e-reader, it revolutionized the market for digital books. But there was no way to know that in the beginning. Other companies had tried and failed to make e-reading mainstream. There was no guarantee that Kindle store would grow into the money-making business that it is today.
The secret to Amazon’s success was revealed in a shareholder meeting in 2011. As Jeff Bezos put it, Kindle was never a “bet the company” proposition. If the Kindle had failed, Amazon would have survived.
In your own life, you can make sure the risks that you take are “affordable” if you come out on the wrong side of the bet.
See, that’s the problem with those society-sanctioned bets that risk homeostasis theory predicts must occur when you choose a “safe” path. Few of us could survive going underwater on our homes, or losing our ability to get to work, or having tens of thousands of dollars of non-dischargeable university debt all come due at once.
There’s no planning for downside in the conventional lifestyle.
We all saw what happened in 2008.
My worry is that now with the economy “recovering,” we’re sliding back into all of the bad spending habits that left us vulnerable to the crisis in the first place.
Before you decide on that new car or the second house or that fancy post-graduate degree, ask yourself, Is this an affordable loss? Or am I just kidding myself?
The Person Who Fails Most Usually Wins
Seth Godin in Poke the Box says the person who fails the most usually wins. But he makes some important clarifications, since many people fail to appreciate the finer aspects of this point:
If you fail once, and big, you don’t fail the most. The game is over, you’re a failure, you’re busted, you’re in jail. But you don’t fail the most.
If you never fail, either you’re really lucky or you haven’t shipped anything.
But if you succeed often enough to be given the privilege of failing next time, then you’re on the road to a series of failures. Fail, succeed, fail, fail, fail, succeed—you get the idea.
The Affordable Loss Principle gets you to focus on the potential downside of any decision you make. But it can also force you to get creative—to find cheaper, faster, less time-intensive ways of pursuing the same goal or opportunity.
Failure gets you closer to success. The more failures you can survive, the more likely it is you will eventually succeed.
3 Key Takeaways From Risk Homeostasis Theory and the Affordable Loss Principle
1. Are you risk compensating?
Risk homeostasis theory says that each person has an acceptable level of risk that they live with. If you de-risk in one area of your life, you will take on more risk elsewhere to maintain your level of acceptable risk.
This process seems to happen without your conscious approval in some cases. That means we have to be mindful of how we’re “acting out” in our lives, especially when we take on boring jobs working with tedious people in unimaginative organizations.
Why do balding middle-aged middle managers buy Ferraris? The risk has to go somewhere. Make sure that you are actually taking risks that can provide real meaning and fulfillment in your life.
2. What’s the risk of mediocrity?
You can’t let the fear of risk become the fear of any kind of change. Change brings opportunities to grow as a person. As Randy Komisar warns, there are ample risks to “keeping your options open” and playing below your true level. The risk of mediocrity is a life led with regret.
3. What’s your affordable loss?
How much can you afford to lose on any given project? Think of your affordable loss as a precommitment device:
I will invest x to achieve y, otherwise I will quit and move on.
This is a common technique that entrepreneurs use before deciding to invest in a new business venture. They decide upfront how much they’re willing to lose.
It might be a set number like $5,000 or it might be a relative amount. For me, it’s two years of expenses. If I can’t build a thriving online business in that amount of time/money, I will call it quits and move on to something else.
If you get into the habit of not “betting the business” every time you make a life change, you’ll survive longer and get more opportunities to succeed (and fail). As Seth Godin says, the person who fails most usually wins.
Are your risks making you better?