Entrepreneurs take risks” — we all have heard this from someone or the other. But how much risk? — This is something no one really knows. Do they take the risk equivalent of speeding the car enough to not get busted or do they risk to the magnitude of jumping outside of a running car? Different people have different opinions on the amount of risk an entrepreneur takes or needs to take. Then how can an entrepreneur decide what to do and what not to? Here is the affordable loss principle that can come to rescue.
To keep it simple, affordable loss means a loss that you can afford. Whenever an entrepreneur takes a decision, he must think ‘will this risk cause my company to go bankrupt or will this loss be bearable?’ If the loss is bearable, it can be worth exploring if the upside is high and has good probability. Palletronell defines it as: “Make a commitment in advance to how much you can afford to loose and stick to it. This principle can be applied in many decision situations to get over inertia. Ask yourself, what can I possibly lose on this decision or by taking this action and is that affordable to me? If it is an affordable loss and the potential gains are large you should go for it. For example, initiating contacts with other people has a very low cost but high upside. By using this principle, you kill failures early and you cumulate success by leveraging on what works.”
It is said that once an experiment was done on chess grandmasters. During their games, they were asked to narrate whatever is going on in their mind. When a study of their thought process was done, it was found that they worked on affordable loss principle. That is, unlike popular belief, they were not thinking many, many steps ahead; but instead, their main focus was whether their next move will cost them the game or will it be a risk that is affordable.
This can make your decision-making process easy. We entrepreneurs face financial, employment-related, taxation, legal and so many other challenges every single day that it sometimes becomes overwhelming to decide what risk to take and what not to. Especially this problem becomes more pronounced for solo founders, because they don’t even have someone to bounce off their ideas. That is where affordable loss principle can come to rescue. Hope this helps you in your decision making process too.
For any queries, write to me on tamhankarrajeev@gmail.com
Rajeev Tamhankar
@rajeevtamhankar
The writer is IIT-R Alumnus, Entrepreneur of The Year’17 (Print Business) and the founder of TBS Planet