- Dawn Reshen-Doty
Risk Aversion versus Risk-Taking
Many people believe that entrepreneurs are a group of people who are generally willing to take risks in order to reap big rewards. A surprising percentage of small business owners describe themselves as conservative rather than as risk-takers, however. The risk-averse definition comes from finance and means an investor who prefers to make low-risk investments that bring minimal returns because of fear of failure. The opposite would be a high-risk, or greedy investor, who is willing to make risky investments in order to potentially reap high returns.
In addition to finance, risk aversion plays a role in the business world. In 2015, a study by the Hartford Group showed that only 33 percent of small business owners said that their primary goal was growth, which was down from the 41 percent of business owners who reported they were focused on growth in 2012. Fifty-five percent of respondents in the same study said that their primary business focus was to maintain their businesses. So what does this mean for businesses?
Pros and Cons of Risk Aversion vs. Risk-Taking Approaches
In 2013, 80 percent of small business owners reported that they were conservative with their business approaches. This trend towards being more risk-averse is still true today. This is a bad sign for the economy as it largely depends on small business growth to fuel jobs and spending. It also means that businesses are not gaining the rewards that they might if they took smart risks. Some business owners choose to stay with what has worked in the past in order to maintain the status quo. When they do this, the competition continues to work to take away the customers and market, and the old approach may no longer be as effective.
A willingness to take risks and an understanding of what risks are worthwhile can help a business enjoy fantastic growth. One illustrative story is that of Sophia Amoruso, the founder and CEO of online-retailer Nasty Gal. Amoruso started the $100-million plus business as an eBay store, and she says she had no idea her business would grow into the giant that it has in just eight years. She points to the willingness to tweak her business and grow. In other words, Amoruso has been willing to take the risks that are needed and change her business accordingly. She has reaped massive returns in response.
Reducing Risk Aversion
If you are a risk-averse business owner, there are several ways that you can reduce your aversion to risk so that you can enjoy business growth. You can start by thinking about the worst possible outcome because it is easier to handle if it does happen. Taking small bets initially can help ease you into the idea of taking bigger risks in the future. Making certain that you develop several alternative options is important.
Being risk-averse can be fatal for the ultimate success of your business. By reducing your risk aversion, you may enjoy business growth and increased profits.