How To Take Risks Without Losing Your Shirt

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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"Entrepreneurs are natural risk-takers." I've heard that phrase more times than I can count ... and it is one of the great myths of entrepreneurship.

In fact, I've noticed that entrepreneurs—and business professionals in general—are usually terrible risk takers.

Now don't get me wrong, entrepreneurs are certainly courageous. They are willing to try a way of life that others are not, and I think that's why people assume that they are risk takers. However, risk isn't really the right word. Just because someone does something outside of the norm doesn't mean that they are doing something risky. And it certainly doesn't mean that they are good at taking risks.

Regardless of the situation, most risks share one thing in common: it's rarely the initial decision that dooms a business. Instead, our irrational responses after the initial decision are what turn regular risks into big failures.

In hopes of helping you avoid the pitfalls of risk taking, here are three suggestions for taking risks without going out of business.

1. Take a Long Term View

If you look back on many reckless decisions in business, they are often made because someone didn't want to miss out on an opportunity. The idea of a vanishing window of opportunity often drives us to make decisions we wouldn't usually make. For example, think about your typical bidding war. Often, we pay more than we want because we convince ourselves that "this is our only chance."

As the famous golfer Jack Nicklaus said, "Extremes never work for long." It doesn't matter whether you're talking about a golf swing or a business move, don't put yourself in an extreme situation because you took the short term view.

Opportunities have a way of presenting themselves over and over again. If you're patient enough to pass on the bad deals in the short term, then you'll usually find some excellent ones in the long term.

Of course, that's easier said than done because we often convince ourselves that the deal we see, or the risk we are about to take, is worth it. Which brings me to my next point...

2. Stop Fooling Yourself

Poor risk taking is often the result of irrational behavior.

We see an opportunity, and because we don't want to miss it, we convince ourselves that we should take the risk. We agree to bad terms, we convince ourselves to make excessive purchases, we choose a poor strategic direction ... often because we get wrapped up in the idea of one possibility and search for reasons to convince ourselves that we are making the right move. This can be especially true for entrepreneurs, who often become enamored with new ideas and possibilities.

Rather than getting wrapped up in the new idea or opportunity, you can avoid poor risks by viewing a range of possibilities for each and every situation. When you're leaning one way, stop for a moment and consider the other view point. What if you did the complete opposite? What would happen? Why would a smart business person not make the same move?

By considering a range of alternatives, you can help prevent yourself from making poor decisions because of irrational reasons.

3. Evaluate the Situation as It Currently Is

Just because something was the right decision three months ago, doesn't mean that it's the right decision today. Of course, that doesn't mean it's easy to change course.

Making the right decision in the moment often requires you to check your ego, ignore the previous time and effort that went into a project, and eliminate your emotional connection to the business. That may sound hard, but the results of unbiased decision making can be excellent.

Here is an example. As the story goes, former Intel CEO Andy Grove was debating with current CEO Gordon Moore about the future direction of the company. At the time, Intel was a company that primarily produced memory chips. They also built a small amount of microprocessors. The problem was that Intel was losing money because of Japanese competitors who were building high-quality memory chips at a fraction of the price.

Grove looked at Moore and said, "If we got kicked out and the board brought in a new CEO, what do you think he would do?" Moore answered by saying, "He would get us out of memories." That was the moment Intel decided to abandon the memory chip business and start making microprocessors. The rest, as they say, is history. Hidden in that small conversation is a very powerful message.

It took a remarkable amount of courage for Moore and Grove to abandon Intel's identity as a company. Despite the difficulty, the two men made the decision that was best for the company at that moment in time. That's the secret to successful risk taking.

Risky decisions can be made as long as they focus on what is best for your business right now. Conversely, if you jump at opportunities and convince yourself of their worth for irrational reasons, then you'll chase one bad decision into the ground ... and your business will come along with you.