Chris Burnor Philosophical Nerd

Upside Vs Downside Risk

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Risk is usually discussed in one dimensional terms, as though it is a scalar that simply has a value in a particular situation. Sky diving is risky. Leaving the root MySQL account without a password is risky. Starting a company is risky. I think this is a mis-modeling of how risk works.

What is risk? Fundamentally, it is simply a probability – the chance that a particular outcome will manifest itself in a given situation. However, it passes a value judgment too. We don’t talk about the risk of winning a particular hand in poker or the risk of being blue-eyed vs brown-eyed. Risk is therefore the probability of a negative or undesirable outcome.

This is where the aforementioned ‘risky’ concept comes in. However, we need to be smarter about how we define that undesirable outcome. Our minds are attuned to very strongly weigh bad things that could happen to us. We generally are much worse at thinking about missing out on good things that could happen to us.

I get asked a lot by friends and family if I think it risky working for a start-up rather than a big company. This is focusing on the ‘bad thing that could happen’ scenario. I call this downside risk.. It misses the upside risk that comes from working at a big company and missing the opportunities of a start-up. As an engineer, I think that I have much higher upside risk than downside risk. There will always be jobs and demand for engineering, but the specific jobs that I choose to work on are the difference between a decent salary and an awesome payout.

We need to think more about risk in this way. Don’t just think about what could go wrong, but what you might be passing up by avoiding that negative outcome.

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