What Every Entrepreneur Needs to Understand About Risk
All businesses are inherently risky. Human beings are terrible at understanding and quantifying risk. Since most entrepreneurs tend to be human beings, this causes problems. Without having a clear picture of what risk is, how to identify it, and how to quantify it, making correct decisions about your business can be hard.
The biggest cognitive dissonance is that people confuse variance and risk. For the purposes of this article, I am defining variance as the variety and difference and outcomes of any given probabilistic event. A six-sided die has more variance than a coin since it has six different possible outcomes while a coin has two.
We define risk as the losses incurred based on the outcomes of one of those events. The greater the amount of loss and the greater the chances of that loss occurring increase the amount of risk in any decision.