Subscribe to Inc. magazine
INNOVATE

Why Your Brain Plays Down Risk

There's a reason you can't assess risk accurately. Find out the tricks your brain is playing on you.

Before the last time you took a risk, you probably didn't think the action was all that risky. It's not because you were being stupid--although some risk-taking certainly can be so--it's because your brain is circuited to downplay risk.

Srini Pillay, an assistant clinical professor at Harvard Medical School and the CEO of executive coaching firm NeuroBusiness Group, writes about the neuroscience behind estimating risk in the Harvard Business Review. "So many of us fall prey to unforeseen risks, believing that they came out of nowhere or that they could not have been anticipated," he writes. "While this may be true in some cases, most of the time risk blindness occurs due to the way our brains are wired."

If you feel like you are taking too many risks when making decisions that affect your company, read Pillay's tips below.

Reward obscures risk

Pillay says that the first reason for your risk blindness is that the potential rewards of taking a risk obscure the downside. When you decide to make a big bet with a brand new product that utilizes all your company's resources, you tend to think about the enormous number of sales you'll generate, rather than how your company will be affected if the product flounders.

"When things are going well, we tend to fly high and lose ourselves in the thrill of the reward," he writes. As most startups fail, how can you rein in your blissful blindness? "One thing would be to routinely ask the simple question: What is my winning preventing me from seeing? If we did this, investors on a roll may register market conditions differently, and businesses experiencing huge successes from recent product releases would not be blind to the impending competition," he writes.

Your brain doesn't count losses

You remember those big losses, but your brain favors the wins you have achieved. Pillay cites a study that found people have a tendency to throw good money after bad because our brain's decision-making center "does not contribute to financial decision-making as much as it usually does because prior investments prevent it from 'speaking up.'" To prevent this, "we should be more honest with ourselves about failed investments, and also learn that facing losses is better than avoiding them," he says. "One way to address this is to automate sunk cost analyses into your strategy process. Schedule such an analysis every month to consciously check in with yourself or your team."

Your brain wants data

Pillay says the third reason we do not realize we're about to fall is due to what he calls "future aversion," which is "the problem of assuming that because the future is unknown it cannot be tested. As a result, when faced with decisions about the future, we may rely solely on present data rather than trying to assess and test the unknown." In order to take fewer risks, Pillay says, you need to be comfortable working without data. Take steps to test an idea and toss it aside and test out another if it doesn't work. Although testing costs time and money, Pillay suggests "taking on a long-term view" by realizing testing could save the business from losing a huge bet in the future. Additionally, "intuition can help us 'know' things about the future that we do not know consciously," he writes. "The brain is capable of feeling before knowing why, so testing out your hunches often makes good sense."

More:
Last updated: Jul 22, 2014

WILL YAKOWICZ | Staff Writer | Reporter, Inc.com

Will Yakowicz is a staff writer for Inc. magazine. He has covered business, crime, and local politics for The Brooklyn Paper and was the editor of Park Slope Patch. He has also reported on the West Bank and Moscow for Tablet Magazine. He lives in Brooklyn, New York.




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: