Good Risk vs. Bad Risk

In his book The Hard Thing About Hard Things Ben Horowitz has this paragraph that outlines the difference between good risk and bad risk. He argues that every decision has two types of risk depending on the upside of the decision. Ben argues that if there’s a high potential upside to a risky choice, then that is a decision worth making. For example, it might seem very risky to start a startup but if you think about the upside of being successful, then it is clearly worth it and the downside becomes irrelevant.

He also argues that it doesn’t make any sense to make a risky decision for outcomes that have little to no upside. For example, what’s the point of changing a big piece of software in your company if you won’t see a significant increase in performance, a decrease in cost, or some other considerable improvement?

Although Ben doesn’t mention it explicitly you obviously still want to acknowledge the likelihood of significant downside of risky decisions. And by significant I genuinely mean life-or-death significant. For example, if you’re going to try a new recreational drug that might make you feel awesome but there is a 90% of you becoming addicted to this drug, then it doesn’t make sense for you to try that drug regardless of its upside. This is an extreme example but I think it conveys my what I am trying to say. A risk that isn’t life-threatening is worth considering in terms of its potential upside and not the likelihood of failure. This framework focused on gain maximization rather than loss minimization might not be wholly rational but I feel that it’s necessary to accomplish remarkable results consistently in any aspect of life.