Upside vs. Downside

Think about the next plan you have, at work, in business, at school, even personally, and analyze it as upside opportunity vs. downside risk.

Downside risk asks “What’s the WORST that can happen?” If your action failed completely, what’s the most you would lose? How much time, money, respect, etc. would you give up?

Upside opportunity visualizes the BEST than can happen. What if everything worked as planned? What would you gain, learn, earn, prove or create?

Iterations of the Loop take steps that limit your downside risk, while exposing yourself to upside opportunity. We take actions that require only small amount of time and that are simple and cheap to accomplish. Given this, we can’t really lose too much. Maybe a day’s worth of work, maybe a small part of our budget, maybe a little embarassment or a bit of a downer feeling. However, it’s nothing that should stop us completely. We have the motivation, time and money to start right back on the next iteration tomorrow.

When you keep Looping, you are running experiments day after day, hour after hour, setting yourself up to be exposed yourself to upside opportunity. Maybe you discover a critical problem that people need to solve, maybe you meet that one person who will change everything for you, maybe you invent a creative solution to a challenge, or maybe you’re leap forward towards creating something great. When this happens, all those little steps didn’t move you forward, or maybe even failed, become miniscule relative to a nearly limitless upside.

That’s why we iterate. That’s why we Loop. We go small so we can survive long enough for our epic win.

When I read authors who talk about taking the huge risk – dropping everything is a live or die effort – one of two things turns out to be true. First, selection bias says that although they represent only a tiny fraction of risk-takers, the winners write the books and give the TED talks. Even if many crash and burn taking a big risk, probability tells us that some people will succeed spectacularly. More often though, what looks like a big risk as part of a story turns out to be a series of small Loops that led to a big payoff. It’s just that the entertainment value telling people about small steps is pretty boring compared to the heroic effort.

Upside and downside also scale out to the larger Loops of our endevours. Startups risk less than established corporations. New products risk less than those with established customer bases. Young people with nothing in the bank risk less than those with established careers (called The Power of Zero by Nicole Glaros). Creating something new risks less than messing with tradition.

Survive, evolve, win.

 


Asides:

Seth Godin¬†often talks about the “lizard-brain” and fear. The lizard-brain is what tells us to be fear speaking up, of talking in public, of taking a chance. One way to tame the lizard-brain is by taking a second to consider the upside opportunity and the downside risk of the action that you’re fearful of. Often we see that the real downside is minor: a bit of possible embarrasment if a talk doesn’t go well, or that somebody will know that you failed, or that your offer will be rejected. However, when compared to the upside opportunity – a talk that influences others, an experiment that proves more successful than you imagined, or the start of a relationship that is life or career changing, the risks that seemed so scary before shrivel to insignificance.

In his book¬†Antifragile, Nassim Nicholas Taleb discusses upside and downside risk in great depth (along with many other topics). He provides a framework for delineating between fragile (large downside with minor upside), robust (low downside and low upside) and antifragile systems (low downside and large upside). Mega-financial institutions who are highly leveraged are fragile, entrepreneurial startups are antifragile. The more complex and interconnected the system, the more prone they are to unexpected, unknowable disasters known as “Black Swans.” This term comes from the idea that although we may see only white swans, we cannot say that a black swan does not exists. In other words, absence of evidence downside risk is NOT evidence of absence.

Leave a Reply