In any endeavor, but particularly in business, it is always good to consider the risk reward ratio. What is this you ask? In very general terms, it can be a comparison of money, time and resources that you might commit to an activity, venture or investment compared to what you stand to gain or lose by it.
Sometimes, we may perceive that what we set out to do carries no risk. We might think that all we will be out is some time, if what we are doing does not work out. Yet, time is a valuable resource. So even if we might not lose money on some venture that does not work out, we will have lost time. That time could have been used for another venture. This would be known as the opportunity cost.
I am not suggesting that we become risk averse. Instead, I suggest we become risk aware. And, in this awareness of risk, we would do well to compare what we stand to lose to what we stand to gain.
Since business is predicated on turning a profit, the calculation of a risk reward ratio is particularly important prior to us setting out on any given endeavor. It often makes sense to compare a variety of ventures to see which one might give us the best risk reward ratio. After all, if our goal is to make money, wouldn’t we want to do something that has the highest probability of working, while presenting the least risk to us?
Of course, there are other factors to be considered. For example, we might choose to sell ice cream in the winter rather than hot chocolate because we are very passionate about ice cream and not interested at all in chocolate beverages, hot or otherwise.
Selling ice cream in cold weather might present us with a poor risk reward ratio, yet because of our passion, we might believe it is a worthwhile endeavor. Whatever the case, at least we will have some idea of what the risk is ahead of time and this can help us with our decision making and strategic planning.
Risk reward ratios are most often thought of in the narrow context of investing. I suggest that this concept can be applied to a broad variety of endeavors in our life, as a critical thinking tool, to good effect.
*Authors note: You might see this column pop up online in a newspaper, under the name Both Sides. I am publishing this column here first at CYInterview.com. For a bunch of years, I have been writing newspaper columns. Since my columns have received a good response on CYInterview, I thought I would share it with you. Hope you enjoy.
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