One of the main lessons of financial theory is that the more risk an investment has, the more return it should offer. Logically, all but the most nefelibate are aware that nothing in life comes for free: if I have to assume the possibility of losing a lot, I will want to have the possibility of gaining a lot. This has always been the case. When the 15th century Portuguese sailed the Indian Ocean with their caravels, they took a very high risk and could lose everything, even their lives, but if they returned, their returns were fabulous. By contrast, those merchants who chose to trade within the Peninsula ran less extreme risks, but also received more modest returns. The existence of an intimate, almost marital, relationship between risk and return has vast consequences, not only in the financial world, but also in the business, political, personal and technological worlds. Is the writer exaggerating? Let’s see.
In many organisations, managers often keep a mistake counter that everyone can see. This glowing error meter determines the duration or professional development in the company or government. Mistakes, remember, can take the form of losses, delays, uncertainty or strife. In these organisations, one goes to the dunghill if the error meter goes too high. This explains why some leaders are, in practice, skittish fawns.
The problem with this is, of course, that they are judged on mistakes, not successes. This in many cases is a problem, remembering that a good hunter is one who catches a lot of game, not one who misses a few shots. This often avoids pushing the more lucrative issues for fear of mistakes. This can be good or bad depending on the importance and probability of mistakes and hits.
On a personal level it is the same, if one does not take risks, holidays will be more franchise-like, friendships more vegetarian and work life more conventional. This is good if you are looking for calm and bad if you want to live in a Joaquín Sabina song.
In the world of technology, it must be understood that return is married to risk.
Technologically, it is the same: to make progress you have to take important decisions with little information, nudge the incumbents and know that it can all end in nothing after years of hard work. You have to take a high risk. If it works, the result can be financially and vitally transformational. That is why the best venture capitalists typically get only one out of ten investments right, and it is the successful investment that funds the returns. It should also be borne in mind that to manage high risk you have to have mettle, know what you are doing very well, understand that you have to measure the process, not the outcome, understand the risk you are taking and trust the professionals. For the latter, you have to have competent, ethical people and align everyone’s interests well.
This is probably one of the biggest differences between us and the start-up nation par excellence, Israel: our relationship with entrepreneurial risk. To put it simply, in terms of risk we tend to distrust people, avoid uncertainty and fear mistakes, not the wrong methods. It is said that there are three rules for writing a successful novel, but the problem is that nobody knows what they are. Fortunately, we do know one of the rules for success in the world of technology: understand that return is married to risk.
Written by Marc Murtra in La Vanguardia: La clave está en ese matrimonio, por Marc Murtra (lavanguardia.com)