Downside Risk

I often hear from managers having difficulty making decisions. There may be many causes for this, but the end result is a strong sense of insecurity. "Will I make the right choice?" Will I do the right thing?" "What if I'm wrong?" The result: excessive worry. stress. procrastination.

When you find yourself in this situation, use the concept of downside risk to help make your "go/no-go" decision. Ask yourself this question: "If I make a 'go' decision and its totally wrong, how bad (damaging) will it be?; i.e., What's the worst case scenario if I'm wrong?" The answer to that question will help you decide how much time and effort needs to be put into your decision.

For example: You may be agonizing over trying a new procedure. Will it work or won't it? Should you or shouldn't you? Assessing your downside you conclude that you might waste an hour of time, $25 of materials, and suffer an "I told you so" from the skeptics. In that case you'll most likely get on with it and see what happens. (Of course if your boss is the ultimate nitpicking critic who watches every minute and every nickle, then you already probably already made a no-go decision.)

On the other hand, if your downside is a waste of an hour, $25 of materials, the possibility of trashing a $50,000 piece of equipment and a good chance of getting fired, you'd best put a lot of thought into your decision including getting a good handle on the support from your boss and senior managers for this experiment.

Downside risk quantifies the possibility of failure so you can validly compare it to the rewards of success and creates a rationale for how much time and effort needs to be put into your decision.

Copyright © 2009 Daniel W. Pelley
All rights reserved.