Finally, A Simple Way to Tell Smart Risks From Dumb Ones

Fellow Riskologist,

Not long ago, I was riding in the car with my friend, J.D. Roth here in Portland. I don’t remember where we were going or what we were talking about, but I do remember we were stopped at a set of train tracks while a long, slow train rumbled through town.

I also remember seeing a pedestrian—a man in dingy, baggy clothes—grow tired of waiting for the train to pass and decide to climb  onto the train between railroad cars to pass to the other side and carry on with his day. At one point, his foot slipped and he lost his balance for just a moment. Thankfully, he recovered and passed through the moving train unharmed.

I was dumbfounded. I looked at J.D. and asked, “Did you just see what I saw?” He was just as shocked. “I can’t believe he did that,” he said.

“That was a really dumb risk to take,” I said before moving the conversation on to another topic.

And it was a dumb risk. Why? Because he gained almost nothing from his success, but even the most minor of failures would have been catastrophic. The scales were not tipped in his favor!

Every single day, you and I take risks. You take a risk when you get in your car and drive through a yellow light on the way to work. Or when you go out for a fast food lunch rather than bringing your own healthy meal. You take a risk when you sneak a YouTube session into your work day in the cubicle.

And sometimes you take even bigger risks by doing nothing when the same time could be spent doing something useful (often our biggest regrets are the things in life we don’t do—not the ones we do).

But not all risks are created equal. Actually, the ones you take every day can be easily categorized into one of two categories: Smart or Dumb.

Mr. Train Jumper took a dumb risk. Lots of people are just like him, exposing themselves to catastrophic losses while gaining little return for their bravado.

But a few have figured out how to spend their days taking smart risks that improve their lives and propel them to new levels of success with little chance of ending up dead, homeless, or any other number of unappealing adjectives.

If you’re interested in learning how to take more smart risks and less dumb ones in your every day life, keep reading.

The Simple and Effective “Smart Risk Equation”

Deciding whether the risks you take are smart and productive or dumb and destructive is surprisingly easy to do when you apply simple logic. I’ve spent 3+ years now studying risk as a full-time job, and one stupid-simple equation I’ve created and dubbed The Smart Risk Equation continues to guide me towards smart risks that improve my life and away from dumb ones that subject it to unnecessary loss. Here’s everything you need to know:

The two important variables are Potential Loss and Potential Reward.

Potential Loss means, “How bad will it be if there is a complete failure?” You might rate it on a scale from 0 to 9 with 0 being no loss at all and 9 being some sort of horrible, unacceptable loss.

Potential Reward means, “What’s the outcome if there’s success?” You can rate it on the same 10 point scale with 0 being no reward and 9 being a life-changing, nearly unfathomable reward.

Do you follow so far? We’re just assessing how bad or good things could be if you take any given risk. The simple equation where RQ= Risk Quotient, PR= Potential Reward and PL = Potential Loss would look like this:

RQ = PR ÷ PL

In my opinion, a smart risk is any one where RQ ≥ 3. Anything below that, and you’re taking a dumb risk.

So, if your Potential Loss is 2, then you would need your Potential Reward to register at least at 6 to qualify as a smart risk. Basically, you just want to look for risks where the potential reward is great and the Potential Loss is low.

Each person will judge the variables differently based on their own understanding, but if you follow the formula, you can keep yourself squarely in the “Smart Riskologist” camp.

Sidenote: The most observant Riskologist will notice that there are no smart risks with a Potential Loss higher than 3. This is consistent with my definition of what makes a smart risk.


The Smart Risk Equation in Action

The formula above is meant to be a simple, mathematical way to decide if the risk you’re about to take is a smart or dumb one. And it is simple, but it’s not actually all that mathematical.

The two variables you assign values to will differ depending on the person doing the equation. You see, we all have the ability to interpret the same situation differently. What looks like a smart risk to one person may be a dumb one to another. And what looks dumb to me may seem smart to you.

This is because there are other variables to consider when figuring out what the Potential Loss and Potential Reward are.

But fear not! You can become very good at assessing smart from dumb risks in your own life by practicing with a few common scenarios we all face and adjusting the variables. Consider it Smart Riskologist practice.

Running a Red Light

You’re on your way to work and you’re running 5 minutes behind. There’s a light ahead that just turned red. You don’t want to be even more late, so you decide to run it. You’ve just risked your life to be 5 minutes late to work instead of 10.

Was it worth it? Let’s apply the formula, RQ = PR ÷ PL.

I’d assess the Potential Reward—at best—at 2. You’re already going to be late. Who cares if it’s 5 minutes or 10? There’s no reward there. And I’d assess the Potential Loss at 8. Running a red light puts you at risk of a dangerous high-speed collision that could easily cost you your life.

In this case, our Risk Quotient is 0.25. Nowhere near 3, our baseline for a smart risk. This is a very dumb risk.

But what if some of the individual variables changed? How would that affect our outcome?

Let’s say the intersection is out in the middle of nowhere, and there are no cars coming in either direction. The chance of collision is low. And let’s say work is at the hospital, where you’re about to be late for an emergency heart transplant that’s going to save someone’s life. And, just for fun, let’s say that person’s life is the president of your country.

Now what’s our Risk Quotient? The Potential Reward is now much higher, maybe as high as 9 (saving a president’s life is pretty rewarding, I would assume). And the Potential Loss is still high, but very unlikely, so we’ll score it lower at, say, 3.

The Risk Quotient is 3. It now qualifies as a smart risk. But just barely. If it were a busy intersection, a Smart Riskologist would make the president wait!

Slacking Off at Work

You’re bored with your job, and you’re daydreaming about something else—probably the funny cat picture your friend emailed you last night. You think to yourself, “No one’s around and I’ve done a lot of work today. I’m going to watch some YouTube videos to pass the time.”

Is this a smart risk? You’re not likely to be caught and punished, but it probably still doesn’t qualify. The Potential Loss is low (let’s say 2), but so is the Potential Reward. What are you going to get from wasting time on YouTube? Probably not enough to move your Risk Quotient above 3.

But wait! What if instead of watching YouTube, you were going to use the time to email potential business partners for the company you’re trying to start? That may move your Potential Reward high enough to make it worth your while.

But wait again! What if you’ve been warned about being off task at work before and you’re skating on thin ice with no savings to fall back on. Still worth it? Maybe not.

As you can see, the outcome of the formula depends on the person calculating the variables. In this way, it’s imperfect math.

What’s important is not finding a perfect mathematical formula to calculate any risk (not currently possible), but coming up with a framework you can plug your own variables into that will help you draw a picture of the risks you want to take in your life.

Is it a smart risk? Or is it a dumb one? What variables have to change to move it from one category to another?

I don’t know, but the Smart Risk Equation can tell you.

Yours in risk-taking,