The Risk Assessment Canvas: A simple way to take calculated risks

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Dragon’s Den star Kevin O’Leary, affectionately known as Mr. Wonderful, is worth about $400 million. He started with no money and a big idea, and took calculated risks over many decades to build his fortune.

He’s an advocate for having a healthy relationship with risk. “Trust me,” he tweeted this November, “if you don’t take the risks, you will ALWAYS lose.”

He’s right. Embracing risk is critical to success in business, innovation, creativity and life.

While we fear that taking risks will lead to loss, the fact is that it’s impossible to win without taking them.

Risk avoidance is a sure way to ‘not win’.

And so risk shouldn't be avoided. But it should be approached mindfully. Here's four questions I always consider, but I rarely see being asked enough:

1.     How big is the risk, actually?

We humans are generally risk-averse. It's a well-documented area of behavioural science.It's not our fault, it's how our brains evolved. But it does mean that we tend to consider risk binary. We feel *any* risk is bad and to be avoided or eradicated and that zero risk is always the best outcome. In fact, risk always sits on a spectrum. Figuring out where the risk is on that spectrum meansasking 'what is the worst thing that can realistically happen if we take this risk and fail?' and 'how genuinely likely is that to happen?' When we ask those questions and really think through them, we often surprise ourselves — finding that the worst case scenario is not particularly bad or likely after all.

2.     What is the potential upside from taking the risk?

One of the causes of risk aversion is our loss aversion bias — we fear losses more than wevalue equivalent gains. Therefore we over-focus on potential losses and under-focus on potential gains. So we need to correct for that by spending more time thinking through and listing out the potential upside. When we do, we often find that the magnitude of the upside is far greater than the magnitude of the potential loss.

3.     What's the potential downside from not taking the risk?

When we don't take risks, we leave room for others to take those risks and benefit from their upside. If and when they do, we actually do 'lose' in a relative sense. They create a competitive advantage or a market share gain *and* they strengthen their own risk muscle, making them more likely to beat us again in future.

4.     Could we easily recover from failure?

This is the question that's barely ever asked. Risk is rarely catastrophic or existential. If our worst case scenario should play out, how easily could we correct and recover? Often when we work through the answer to that question, we discover that we're perfectly capable of recovering from the failure quickly, cheaply and easily. When weighed against the potential upside, this is often when the equation balances in favour of taking the risk.

When we don't ask those questions, we default to avoiding risk. When we do, it puts us in a position of being able to take the positive, calculated risks that lead to long-term growth, wealth and happiness.

So to help ask those questions, we’ve created the Risk Assessment Canvas.

It’s a simple tool for anyone to use to assess whether a risk is worth taking.

You can use it on your own, or in a team. Just work through the questions, give your situation a score for each, add the scores up, and you’ll end up with a logic-driven assessment of whether or not the risk you’re considering taking is worth it.

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Risk Assessment Canvas

Risk Assessment Canvas

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