Raising entrepreneurs: Risk tolerance
When I was in the early years of running my first business, I hung a bulletin board right beside me at my desk. On it I had three things: a graph showing compound interest on savings, a page torn from the Whole Earth Review with a quote by Helen Keller, and a tiny quiz “Could You Be an Entrepreneur?” torn from a business magazine.
I had failed the quiz.
I remember specifically that the accompanying article said I should be very organized and I absolutely was not. Yesterday I took a quiz on forbes.com that would gauge whether or not I should be an entrepreneur. It’s too late for me to heed anyone else’s advice — but I was heartened to get a decent score this time. Apparently, I’m only held back by my disorganization and the fact that I would jump the gun and start working on a project without a signed contract.
Could you be an entrepreneur? Could your child be an entrepreneur? A business owner? A freelancer? There may be natural traits that would lead one in that direction, but there are also skills you can develop by having the right sorts of learning experiences.
Risk tolerance is an oft-discussed entrepreneurial trait, but it’s frequently misunderstood. Risk tolerance doesn’t mean craving risk. It doesn’t mean entrepreneurs are danger junkies, like extreme sports fanatics who snowboard avalanches. Far from it — entrepreneurs want to make good decisions. They’re just willing to take calculated risks when they’re confident those risks have a good chance of paying off.
That willingness to take a risk is key.
Successful entrepreneurs are masters of taking good risks. They’re willing to bet on themselves.
If we accept that our children will be entrepreneurs in the future — CEOs of their work lives, if nothing else — how do we help them develop the confidence to believe in their ideas?
Is your child comfortable marching to the beat of a different drummer? Is he able to break free from the crowd to go his own way?
Investors need to be able to tolerate risk in order to reap rewards. Those who can’t tolerate risk will stick to the safest investments and therefore earn the least amount of return; over time, their nervousness will have a cumulative effect on what they’re able to accomplish. Successful investors — and entrepreneurs — can weigh options and take appropriate risks. They can get in the game — and you can’t win if you don’t play.
Investors must have the mental fortitude to ride out the ups and downs of the market. Likewise, entrepreneurs must have the fortitude to ride out the ups and downs of running a business. The reason that corporations take more of the profit share than employees is because they shoulder most of the risk. When times are hard, the employee who might find himself out of a job — the corporation keeps going. Shouldering the risk and taking on the responsibility gives you the decision power and the control. (Whether corporations wield their power responsibly is a whole other topic.)
Warren Buffett famously advised that an investor should “be fearful when others are greedy and greedy when others are fearful.” The entrepreneur is someone who essentially invests in himself. He has to be willing to take a right when everyone else is going left. When the economy is down and people are most fearful, an entrepreneur will start a new business. He sees opportunity where others only see risk. When the economy swings up again, the entrepreneur is poised to make the most of it.
How do we help our children develop a tolerance for taking risks?
- We let them make mistakes, and we let them know mistakes are unavoidable when you’re doing any kind of significant work. We encourage resilience and confident problem-solving.
- We give them time to explore and experiment. We invest in their interests and passions.
- We don’t get in the way. We let them own their own work, their ideas, and their successes.
- We praise them for being strivers and problem-solvers rather than geniuses.
- We help them reflect on their choices and the outcomes. We help them connect the dots: effort, mistakes, persistence, resilience. We develop a family culture that celebrates doing, making, learning, and growing.
The most important thing about risk tolerance is that your child doesn’t let a fear of failure hold him back from working to make his ideas happen. He’s willing to invest in his own ideas. He’s willing to invest in himself.
Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure, or nothing. — Helen Keller