I just read Seth Godin’s post about Risk and Reward. He talked about the trade-off between Risk and Reward, and how you have to take on additional risk in order to get additional reward. (Which is true.)
And he had this nifty graph:

Minor quibble- Traditionally, Risk is charted on the x-axis, reward (return) on the y-axis.

Risk reward graphs were developed originally for Financial Analysis. Of course, lots of armchair economists have lighted on the idea of applying the graph to other things, especially business endeavors. That’s fine, except people usually think of it the wrong way:

Most people think that the line on the graph represents progress made through time, and that their risk/reward timeline goes like this (as viewed entirely from someone at point A):
A – “This is where I am. Everything is more or less safe.”
B – “If I started this crazy idea, there would be a lot of risk up front, and not much return for a long time. That scares me. I’ll do nothing.”
C – “Off in the distance, if I survive all that risk, the rewards will be phenomenal! I’ll be a millionaire.
D – “People who are successful continue to get a lot of reward, and they risk less and less.”
The problem with that is… well, it isn’t true. And it isn’t what risk/reward graphs were intended to show.
First of all, there is no time axis on a risk/reward graph. The graph isn’t showing a progression, but rather the risk-reward relationships of a number of discreet courses of action. The line, called the “Efficient Horizon” is the leading of edge of “highest possible amount of reward for any particular amount of risk.” What it shows is, basically, that if you are only willing to take on a certain amount of risk, you are limiting your potential for return. That graph looks something like this:

All possible courses of action are on or under the line on the graph. People who are under the line are not getting the maximum amount of return for the level of risk they are taking on. People who are on the line have optimized their risk/reward profile. When we look at where certain types of income-generation/entrepreneurship fall on the graph, there are four areas on the horizon.

A – Safe. Dependent. Traditional employment. Comfortable.
B – Independent. Entrepreneurs, sales people, small business owners.
C – Maverick. Deal makers, big business builders, venture capitalists.
D – Crazy. Gamblers, get-rich-quick, schemers, criminals.

The people at D are taking on way more risk than the people at C or B, but they’re potential of reward is not much higher (assuming they even get any reward- remember, risk means “It might not happen for you”).

The D people are nuts, so forget about them for a minute. The people that really concern me are the people at A. They (mostly) aren’t there because they love traditional employment and are happy with the level of reward they are getting. A lot of these people want to be at B or C, but are so risk adverse that they won’t ever take the big jump and quit their job or start a business or whatever.

Unfortunately for all those people, that graph isn’t quite accurate. A better way to look at it is:

This way of thinking about it points out that once you get below a certain level of reward in your activity, your risk actually begins to increase. Think about it. How many small business owners have been laid off in the last year? How many employees have been laid off? While the B and C people may look like they are taking on risk, it’s the A people who are really in a risky situation. Partly because of that perception problem- they can’t see their risks, and have no way of managing them.

Also notice that the B and C people have approximately the same amount of risk. I believe that’s about right. They are both risking bankruptcy, failure, loss of confidence, embarrassment… but neither one of them will starve. Neither one of them is going to die if they don’t “make it.” But a lot of Bs (and all the As) think that it is so much more risky and difficult to be a deal-maker.

What should make the difference between the Bs and the Cs isn’t risk tolerance but vocation. I, for example, want to live about a third of the way between B and C. It’s where I’m happiest (which I could show you on another chart).

What I’m getting at is this- A is nuts. D is nuts. Everything from low-level B (sales people) to high level C (Donald Trump) is fine, but what’s important is that you do what you love, as opposed to avoiding what you’re scared of.

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Not incidentally, I think there is a similar risk-reward chart that could be drawn for any set of decisions that could be made once you already are functioning business:

1. People have always bought newspapers, we should keep selling them the same way we always have.
2. People love music… what if we made a little device that played music, but we make it look really cool… cooler than anybody else’s little music playing device.
3. Let’s give away for free the thing we are most known for, and then- as a sort-of side thought- make billions of dollars by reinventing the way people advertise.
4. Let’s give away for free the thing we are most known for… and then… you know… we’ll get rich. Somehow…

I don’t have the time to think about that more- so maybe someone else could cogently build their own post about it.
OR
If anybody has thoughts about it that I could steal for a future post, I’d love to hear them.