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In 2004, not many people knew of Facebook, let alone what it would become.
PayPal co-founder Peter Thiel was the first investor to capitalize on their potential when he put in $500,000 to value the young company at $4.9 million. He made a 2000x return when he cashed out after their IPO in 2012.
Today, Thiel continues to be one of the most prominent Silicon Valley investors. He’s received a lot of media attention for his engagement in politics over the past year or so, but his professional arena is venture capital, and he has a strong track record to show there.
Last year, in an interview with Y Combinator, Mark Zuckerberg was asked about the best advice that Peter Thiel had given him during his early days leading Facebook, and what he thought of it.
Zuckerberg had the following to say. “Peter was the person who told me this really pithy quote: ‘In a world that’s changing so quickly, the biggest risk you can take is not taking any risk.’ I really think that that’s true.”
While Zuckerberg was relating the quote to his experience as a CEO of a technology company, the underlying message also applies to our own lives.
Many of us have a skewed perception of risk, and we have a tendency to avoid anything that resembles downside. As the rate of change around us increases, however, this perception will become pricier and pricier.
Contrary to popular belief, risk isn’t always a bad thing.
The Cost of Stagnation Is High
Traditionally speaking, the past has been a fairly accurate predictor of the future. What worked for our parents was a reasonable indicator of what may or may not work for us moving forward in our own lives.
If your parents got an education and then spent the next few decades in a particular career, then you could be reasonably sure that it was a safe move.
Although there has always been change in the world, this change moved at a slower pace. Up until the Industrial Revolution, most people didn’t live in a world that was too different from the world that their parents were raised in.
With the invention of the steam engine and similar technologies, this began to change, but even so, for the next hundred or so years after the Industrial Revolution, we could take a look at the past and use it to give us a general direction to orient ourselves in and be relatively confident in our choices.
This is no longer the case. In a world dominated by algorithms and the internet, the traditional paths that we associate with being risk-free may still guide us for a while, but over a long enough timeline, they’re not enough.
The length of time that the status-quo remains the status-quo is changing quite exponentially, and unless you’re willing to make bets that are risky and expose you potential downside, you’ll eventually be forced into situations in which you have no choice but to experience downside.
The cost of not changing in a changing world is getting higher and higher with each day, and the only way to keep up is to take smart, calculated risks.
The familiar option is no longer the safest.
It’s a Game of Probabilities
When people think of risk, they associate it with a negative connotation.
They have a bias towards the thought of the downside. It makes sense, too. It’s how our brains are programmed. We feel losses almost twice as heavily as gains. It’s a product of an outdated evolutionary response system.
In reality, not only are most of the potential losses associated with the risks we’re generally exposed to not as bad as we intuitively think, but by thinking of the downside in absolute terms, we neglect the corresponding rewards.
For example, take Peter Thiel. If he had only looked at the $500,000 he invested in Facebook as a number he was putting on the line, he would have only seen one side of it. He would have ignored the possibility of a 2000x reward. It was his risk that made the reward possible.
It’s easy to put this in context in terms of money, but the way many of us consider risks in our personal lives isn’t the same.
When we think of switching jobs or making bets, we get caught up and discouraged by the idea of a short-term hurdle, while ignoring the relative long-term reward that could come with exposure to that hurdle.
If a guy like Peter Thiel has an opportunity with the odds he had with Facebook, he should invest his money every time if he can afford it. He will likely lose most of it due to the rarity of the outcome, but because the reward is so disproportionately large, over a long enough timeline, it compensates.
If the odds are in your favor, and the downside isn’t too harmful (which most of the time, it isn’t), then over a sustained period, you will come out ahead by taking good risks, even if you lose here and there.
The alternative is maintaining the status-quo and eventually losing by default.
Take Your Shot
In the past, being risk-averse meant stability. In the future, it’ll mean pain.
Naturally, there is such a thing as a bad and dangerous risk, and it’s important to know how to evaluate each situation relative to your circumstances. There are also ways to dilute risk, and it’s worth understanding how to do so.
Either way, we no longer live in a world in which stagnation is acceptable and cost-free, and for the most part, consistently abiding by a fading status-quo is the surest way to fall behind and end up on the losing side.
The beauty of risks is that they also expose you to rewards. There is nobody who has done anything meaningful on a large scale who hasn’t in some way put themselves out there to face possible failure. They just know that the math is on their side if they’re diligent in manipulating the odds in their favor.
Let yourself be bold and don’t rule out audacious dreams or unconventional paths if you have equally effective execution plans to get you.
It’s may be a shot worth taking.
