Rational Risk

Something like 80% of small businesses fail in the first year. Those aren’t good odds. So why do people start small businesses?

Let’s assume for a moment that it’s not total ignorance of the statistic. Some of it might be, of course, but even for people who know that 80% fail, some try anyway. To begin with, the 80% distribution of failures isn’t random. There aren’t 100 equally-viable businesses, of which 80 crumble through no fault of their own. Sure, the slings and arrows of outrageous fortune play some part in any business’s success or failure, but they’re not as big of a factor as all of the controllables are.

No, what makes people start businesses isn’t ignorance of the statistic, it’s the awareness of the fact that it isn’t random combined with the general faith that they, personally, are in the 20% of viable businesses. Of course, 100% of people can’t be right about being in the 20% minority, but that doesn’t shake people.

And it shouldn’t! It’s good that people take these risks – if no one took the risk, we’d have zero new businesses. The process of sorting through them is what advances us.

Humans are bad at risk assessment, as a general rule. We don’t have intuitive calculating machines in our brains, we’re not great at “gut-level statistics,” we don’t evaluate probability well. Often I lament this and work hard to try to train myself to do it better. But to some extent, I think a lot of our species-level survival has depended on the very fact that we’re bad at knowing when not to jump.

We very often think there’s more risk than there is, and we frequently think there’s less. If you’re going to have to make one of those errors, make the second one. The worst that can happen if you jump when you shouldn’t is that you die. That’s not nearly as bad as what will happen if you don’t jump when you should, which is that you never live.