Taking the right risks can make or break a business. Mishandled business risk taking has led to numerous disastrous outcomes, Yet, the right kind of risk taking can bring tremendous success. So, it is important to take the right risks that can lead to higher rewards.
A recent Wall Street Journal article offers an interesting discussion of risk. The April 24, 2023 article is titled “Musk in 24 Hours Shows Taste for Risk” and was written by Tim Higgins. The article says. “In an era when risk management is a standard part of C-suite calculations, Mr. Musk has made his career and fortune tolerating the kinds of bets that would strike panic in many corporate soldiers.” The article talks about recent big risks by Musk including his latest rocket launch, changes he made at Twitter, and his decision to put volume increases above profits at Tesla, his automobile company. The article reports that Musk took all these risks “in the span of 24 hours this past week.”
In my view, as someone who has researched business success and failure patterns for 25+ years, this article is consistent with the ongoing trend in business to glorify risk taking far more than is warranted. Yes, Musk has been extremely successful. Yes, he has a taste for risk. And, according to the article, “these new gambles come as the 51-year-old billionaire enters the stage of his entrepreneurial career when big stumbles could end up overshadowing previous triumphs and undoing what he has built.” But, despite some mention of potential downside, the article does seem to associate a taste for risk with Musk’s success and tremendous wealth, consistent with the trend of excess glorification of taking more and bigger risks for business success.
Nonetheless, appetite for risk is not one size fits all. Just like there are a variety of different business models that yield success, appetite for risk can vary widely. Musk, and also well known risk taker and successful business titan Richard Branson, have a far greater taste for risk than most people do. However, that doesn’t mean business success necessarily requires big bets. Nor does it mean success is much more likely when big risks are taken. According to my many years studying business success and failure patterns, prudent calculated risk, not high risk, is what leads to high reward.
That doesn’t mean making big bets is wrong for Musk. He has a taste for risk. He is willing and able to accept the losses that come with taking those risks. As Richard Branson explained about the art of risk taking in one of his books, successful risk taking depends on being able to tolerate the downside. Musk seems very willing and able to tolerate the downside of his big bets.
And, the kinds of risk Musk takes do have their advantages. As the Wall Street Journal article said about SpaceX, Musk’s company that launches rockets, it “is built on failures that engineers learn from to improve future reusable rockets. Its first three rockets exploded, nearly sinking the company in its infancy. SpaceX eventually found success with the Falcon 9, which it used on 60 launches last year. The rocket has become crucial to the U.S. space program.”
The point here is that Musk is willing to accept losses in order to learn. In some ways what he is doing appears to be like a kind of research laboratory, rather than merely a high risk business. Funding research can be valuable for the knowledge it creates. Useful learning can sometimes even come from purely exploratory research where the value, if any, is not necessarily known up-front. But, if useful knowledge does emerge, that knowledge can be applied to reduce the risk of future endeavors. This doesn’t mean that all companies should spend lavishly on exploratory research. How much of that a company does depends on its individual situation. But, sometimes, exploratory research can have value. So, choosing to risk failure for learning purposes can be useful in the appropriate situations, but not to the point where emphasizing failure is excessive.
A major problem, however, is when risk taking gets glorified, leading to huge bets being made under the mistaken belief that more and bigger risk is needed for high reward. For example, businesses may venture into risky new areas where they anticipate big profits. Instead, because they made such a risky bet, they get huge losses. These companies did not incur their losses intending to make learning investments viewed as research to improve knowledge. Instead, they took those big risks expecting considerable profits, yet ending up with the tremendous losses that high risk often brings.
In conclusion, taste for risk can impact how much risk a business decides to take. High risk generally does not lead to high reward. But, if there is a taste for risk, some companies may choose to incur more risk for learning purposes. And, that may work for some companies, such as those run by Elon Musk. But, business should not make the mistake of thinking that they should take more and bigger risks expecting high risk to bring high reward. It doesn’t. Instead, taking the right risks, which are prudent risks, not high risks, is what generally leads to high rewards.
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