On Thursday, I recounted a conversation I had with a friend about risk and money, and I alluded to the notions that starting a business is not risky and that risk is a myth.  I wanted to elaborate further on why I think risk is nothing but a myth.

Risk = Absence of Knowledge

In short, risk is simply a function of knowledge.  It is inversely proportional to the amount of knowledge you have.  The less you know about something, the riskier it is to get involved in it. 

For example, when you ride a bicycle, it’s not risky.  You know how to ride it.  You know how to maintain your balance.  You understand what the pedals do.  You know where the brake is and how to use it.  You know to stay on the bike paths and not wander onto the street.  When you get on the bike, you don’t even think twice about it or worry about risk.  You simply get on and go.

But there was a time in your life when riding a bike was actually risky.  When you were 4 or 5 years old, getting on a bike was as risky as anything because you did not know how to use the pedals, maintain your balance, or ride it while paying attention to your surroundings.  You did not know anything about a bike and, thus, thought it was risky to ride it.

What changed?  All of the knowledge you gained by learning how to ride a bike virtually eliminated the risk in riding it.  It used to be risky.  But it’s not anymore.  You can almost do it with your eyes closed.

Increase Knowledge = Decrease Risk

The bicycle analogy illustrates that, the more we increase our knowledge, the more we decrease risk. 

(For another analogy, check out my post about Robert Kiyosaki’s car metaphor for investing.)

Here’s another example: When my boss comes to me with a research question or issue, I don’t volunteer an answer on the spot.  I don’t know the answer because I haven’t done the necessary research.  Thus, it would be “risky” for me to give an answer because I could be wrong. 

However, by researching and reading up on the issue or subject, I acquire knowledge that helps me form an answer.  After two or three hours of research, I can give an answer that I’m confident will be right.  At that point, because of my newly-acquired knowledge, it’s no longer “risky” to give an answer.

You can apply this process and this mindset in any other aspect of life.  We’re all born without knowledge.  We only have physical skills and talents that we can hopefully use.  But intellectual knowledge or information on how to do something can only be acquired through effort.  This effort for knowledge is what decreases risk.

Risk is Not Permanent

What does this all mean? 

The idea that risk depends on the amount of knowledge you have illustrates that it is not a permanent obstacle.  The major problem I have with people who say that “investing is risky” or that there are too many “risks for investing money” or that “starting a business is risky” is that they think that “risk” is a permanent barrier to success in these areas.

However, because risk decreases as knowledge increases, the formidable monster that is risk can be reduced to a small bump in the road.

Starting a Business is Not Risky

Thus, starting a business . . . like riding a bike or giving legal advice . . . is not risky.  It is only perceived as such.  When a person first encounters an activity or some other endeavor, it may seem risky.  But that’s only because you don’t know anything or know very little about it.  Once you learn about it, you drastically reduce your risk.

People who start businesses don’t just fire shots in the dark, hoping for something to stick.  (Well, some do, but a lot don’t.)  Entrepreneurs venture into areas they either know about or learn about.  The knowledge they acquire helps them reduce their risk when they ultimately put up a live website to sell a product, or open a store to provide services, etc.  They’re not the risk-takers they’re perceived to be.  They simply know how to manage risk.   

And how do you manage it?  Simple: 

The more knowledge you acquire, the less your risk will be.

If you like this post, please consider subscribing to my full RSS feed.  You can also subscribe by e-mail and have a copy of each new post automatically delivered to your inbox.

If you like this post, please bookmark it: These icons link to social bookmarking sites where readers can share and discover new web pages.
  • del.icio.us
  • StumbleUpon
  • Propeller
  • Digg
  • Technorati
  • Reddit