Risk, Ambiguity and the Small Business Owner

Readers of this blog typically fall into two categories:

1). You are an owner/operator of a small business
2). You work for an owner/operator of a small business.

Most of these businesses happen to be in the recreational marine industry, an industry that has been hit especially hard by the current recession. What causes stress and anxiety in our professional lives? Typically, it’s “fear”. We fear what we don’t know or don’t understand. In a volatile economy, these fears are heightened because we can’t predict with any level of accuracy what’s around the corner. One’s ability to “predict the future” is never very accurate. However it’s not the risks inherent in our businesses that cause our blood pressure to rise, but it’s the inherent ambiguity in any entrepreneurial endeavor. One’s ability to contend with and manage ambiguity is the true test of the small business owner or entrepreneur.

The “risk” of running your own business

What keeps people from starting their own company or taking the entrepreneurial plunge? “I don’t think I can handle that much risk,” is what most people say. They are afraid to leave their “stable, comfortable” job, unaware of what awaits them when they step out of their office one last time.

In his interview with Inc., Good to Great and Built to Last author Jim Collins was asked by Bo Burlingham if entrepreneurs must inherently understand how to manage “risk”. Collins responded as follows:

“Not risk. Ambiguity. People confuse the two…. As an entrepreneur, you know what the risks are. You see them. You understand them. You manage them. If you join somebody else’s company, you may not know those risks, and not because they don’t exist.”

At a time when even giants from insurance and automotive industries are tethering on the brink of collapse, Collins couldn’t have made his point any clearer. Job security is a scarce commodity these days regardless of your industry. Ambiguity breeds opportunity.

Let’s say you were presented with two fists full of marbles. The right fist contains five red marbles and five blue marbles. The left fist also contains a total of 10 marbles, all of which are red or blue, but the number of red and the number of blue marbles is unknown. For instance there could be nine red and one blue, etc. Invariably, when given a choice of which fist to pick either a red or a blue marble out of, people chose the right fist. On the surface, making the choice that offers 50/50 odds seems obvious. In reality, one is just as likely to pick the correct-colored marble from the left fist, with an unknown mix of marbles.

 

This is known as the Ellsberg paradox. The right fist has a “risk” of 50/50. The left fist is “ambiguous” since you don’t know the odds. The preference to the “known” 50-50 risk is characterized as ambiguity aversion. In other words, people tend to “stick with the monster they know and avoid the monster they don’t”. The outcome is ambiguous.

What suits your personality and goals? You can choose to be your own boss or choose to support your boss. The choice is yours, but sitting on the sideline and complaining about the economy or management’s decision to make necessary (and often difficult) business changes is not an option.

Choosing to be your own boss

Taking the path of the self-employed takes guts. No doubt it’s a financial gamble. You might have to endure years earning income below what you’re used to, forcing yourself to live frugally and having to sacrifice your vacations. You would have to learn how to handle all aspects of your business, from convincing your investors to selling to your customers. But the trade off is gaining control over your company’s direction. You steer it where you want it to go. There will be problems, naturally, but you can learn to anticipate them and work out feasible solutions. You would no longer be at the mercy of superiors who call the shots. Best of all, you stand to reap the maximum reward for your efforts.

Choosing to support your boss

However, the fear of “sailing on your own” is not unwarranted. Approximately half of all new businesses are expected to close shop within five years from their establishment. And among those remaining, only a minority will turn out to be truly successful, creating a brand that caters to the needs of their target market.

Preferring to be pragmatic because you cannot afford (either financially or mentally) to be ambiguous, especially with regards to you and your family’s future, is a viable option. The best course of action at this point is to “be a light, not a critic”. Shine in the workplace. Put your heart and soul behind your endeavors. When financial times become more positive you will likely reap the benefits.

For boating enthusiasts; marinas, boatyards and boat dealerships can be thought of as a respite from the gloomy financial news or an unfulfilling career. Boaters “boat” to get away from the rat race. Your attitude and demeanor can make or break that experience for your customer. Regardless if you choose to pick your ball from the “risky” fist or the “ambiguous” fist, resilience is the virtue needed to thrive in this economy.