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How to measure risk

I think most people are HORRIBLE at measuring risk…

I’ve been talking to a few people who want to leave their cushy and boring gigs to either: a) move to SF to join a small startup that they’re passionate about OR b) start their own company.

What I’ve noticed about these folks is that most people are horrible at analyzing risk.

One thing I’ve studied for the last 7 or so years is risk taking. What bets to make, when to make them, and how to protect the downside.

And, while I’m far from being GREAT at it, my process for deciding what to do has served me well.

Here’s a simplified version of how I decide on risk:

1. Write out the risk you’re deciding on.

In this case, we’ll make it leaving a 5,000+ company where you’ve been an accountant with little impact for the last 5 years to move to San Francisco where you’ll join a 5 person startup that has a product you love and a position where you’ll make an impact.

2. Make a list of possible worst case scenarios.

a. The company tanks after 3 months and I get laid off.
b. I hate San Francisco and want to move back home.
c. I embarrass myself in front of my friends and family who all said I’d fail (if the above options happen).

3. Address each possible worst case scenario and decide if you’re willing and able to be happy if that scenario happens. If no, make a list of solutions so that possible worst case scenario because nearly impossible.

a. The company tanks after 3 months and I get laid off

– I have $30k in savings. So as long as I spend less than $3k a month, I’ll have 10 months of runway. I think I can figure out a solution within 10 months.
– Because of the above, I’ll only get an apartment where I pay $1,200. This means I’ll need roommates and may not have a nice place, but I’m fine with that.
– During that 10 month runway time, I can drive Uber or work in restaurants. I don’t want to do that and won’t be happy. But, I do think I can get a gig at a large company like IBM or Intuit because they’re always looking for accountants. I won’t love this, but it’ll pay $100k and won’t be hard work. I’m comfortable with that. So, I’ll begin networking with IBM recruiters just in case.

I’m comfortable with the above plan and know I can execute on it.

b. I hate San Francisco and want to move back home.

– I think I’ll know this within 3 months, so I’ll have enough money to get back home as well as about 7 months of runway left (plus my job earnings).
– I’ll ask my parents if they’d let me move in with them for a few months if I decide to do this. They will. I’m fine with that.
– I’ll explain to my current employer that my passion is to move to SF and join a startup. I’ll end things well with them and make sure I can join them if I don’t like SF.
– I’ll also make a list of other companies I like in my hometown that I like. I’ll begin making contact with them so they know me and, if shit hits the fan, I’m confident I can get a gig there with 7 months.

I’m comfortable with the above plan and know I can execute on it.

c. I embarrass myself in front of my friends and family who all said I’d fail (if the above options happen).

– I’m not comfortable failing in front of people. It’s crippling.
– So, I won’t post on FB, Insta, or other social networks until I know I’m happy in SF and am making things work.
– I’ll only tell my employer, my parents, and a tight knit of friends that I’m moving.

Another way to do this is by listing the WORST (even if not likely) outcomes then go through them:

1. I’ll run out of money and be homeless and hungry – not likely, so let’s not consider it.
2. I won’t have a job. Well, we already said working at IBM is likely solution to this, so it’s not worth considering.
3. So on and so on…

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If I’m comfortable with all the downsides I’ve listed out and am confident that I can execute on the contingency plans all while living a life that I’m willing to live, then I consider the upsides.

Things like: I’ll set myself up to be happier, become rich, won’t have regrets in 50 years, learn about myself, meet new people.

I won’t go into the upside, but it’s the same process as the above: list out the possible positive scenarios.

Then, so long you like the upside, even if just a little, and you’re willing to live with your downsides, then the solution is easy: do it.

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Overall, this strategy isn’t unique.

And many of you are reading this and thinking “this isn’t special and is just common sense.” That’s true.

But, it’s the process that matters. Most people let their emotions hold them back from doing what they really want.

So, this process of actually writing things down and mapping out the possible outcomes typically gives people comfort and, most of all, proves that the downsides typically aren’t that bad and the upside is worth the risk.

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