Risk Reward

It is commonly held that reward drives the risk/reward binary. This might sometimes be the case. However, consider the opposing view, that it is the reward that is in service of the risk. Let me explain. Consider the axiom – “Buy Low – Sell High”. Typically, one focuses the “Sell High”, the reward factor of the equation. But how did you get there? It was the “Buy Low”, the risk, that led to the reward. In fact it is the risk that drives everything in this case, without it, there is no reward. The reward actually does double duty, as it inspires and emboldens future risk. In times like these, the temptation is to resist risk, but then where is the reward. Investors like Warren Buffet know that this is precisely the time to risk, for future gain. Again, risk is in the driver’s seat.

The recent Target launch of the Missoni line created enough traffic to crash Target’s website. A disaster, a risk gone badly? Hardly! A retailer’s dream. Not only has Target garnered world-wide attention for its stores and products, but a risk with such high reward only creates an insatiable hunger for more risk. The particular reward of the particular moment is nice, but its the risk that is the gift that keeps on giving.

Think of it in another way. Every employee likes to get rewarded. For most it is in the form of increased pay, but others prefer benefits like flexible hours, better insurance or a better office. These things don’t magically appear, they are the result of successful risk. Again, risk generates two rewards – the obvious material enhancements, but also a boost in workplace morale. How? People, employees, like to be heard, they want to be valued, they want to be recognized for their contributions. Studies show that we want this even more than pay raises. A company that demonstrates that it is willing to take calculated risks, that the company is trying to improve, and then passes along the rewards to its employees will boost morale and loyalty much more than the company that plays it safe and is not able to share rewards. You can risk without reward, but you cannot reap reward without risk.

Daniel Fisher, of Forbes Magazine, wrote an article in February 2011, entitled “Study Turns Risk/Reward Relationship On Its Head”. http://www.forbes.com/sites/danielfisher/2011/02/03/study-turns-riskreward-relationship-on-its-head/ The theme picked up on a paper in the Financial Analysts Journal that suggested that low risk investors have done better over time just as high risk investors have had significant losses, some up to 90%. Makes us re-think risk, doesn’t it? Nope. It makes us consider how we risk, not should we risk. Jump back to Target. There is no way that a huge retailer and a high-end brand decided over drinks one night to “get together and see what happens”. Yes, they took a risk, but that risk was planned, calculated, and carefully implemented. Perhaps they didn’t anticipate the scope of the reward, but that’s just a bonus. The real reward is that their risk worked. Even caution can have great yield, as Fisher and the Financial Analysts Journal hint at. In the end, you have to be in the game.

What does this mean for you? As a leader in business, and in your private life, there is no way to escape risk, though we may try. Fear paralyzes us, so we must take a reasoned and calculated approach to risk and use it to our advantage, and not wait for it to make decisions for us. Our employees depend on us to take the risks necessary to generate reward and create a sustainable company and business environment. In the technology sector, change is rapid, and opportunities for risk are readily available. Take them! You will fail. But, you will learn from those failures and demonstrate the kind of courage necessary to be a leader worthy to be followed. You will succeed too. In those cases, the risk once again creates the double reward – you’ll have the spoils of victory in the moment, and you’ll be energized and confident to try again the next time an opportunity is presented.

Go ahead, jump. Do it before you get pushed.