Value of Risk
A little overconfidence can go a long way.
I didn’t think my son would drown, but the thought crossed my mind as he climbed to the top of that water slide. After all, I’ve read a lot about the dangers of overconfidence. And yes, it sucks to be an arrogant bastard. In fact, seminal psychologist Daniel Kahneman called overconfidence the one thing he would eliminate if he had a magic wand. Not hatred or violence or deception, but overconfidence — because being too sure of one’s self leads to so many other problems.
But while overconfidence is bad, underconfidence is worse.
Live a little
See, my son is only just learning how to swim. The other weekend we got invited to a pool with a water slide. It was sweet: 12 feet tall with twists and a tunnel. My son saw it from the parking lot and declared that he was going to spend the entire afternoon going down it.
Inside, however, the lifeguard delivered a reality check. The water at the bottom of the slide was six feet deep, the water wings my son has become too attached to were forbidden, and parents weren’t allowed in the splash zone to catch their kin. “Swimmers only,” she said.
His plans ruined, my son started to cry.
Since it’s no fun to watch a kid cry, I told him that I thought he could try going down the slide. I told him I was sure he could swim. And I told him that while I couldn’t be in the splash zone to catch him, I’d tread water nearby just in case.
Game on.
You don’t know until you try
Overconfidence has a redeeming quality — and that’s that it leads to development. Whether you fail spectacularly or discover that you can do something you didn’t think you could, you put yourself in a situation where so long as you survive, you get better. Even in the wake of spectacular failure comes reflection and learning. That’s the true value of risk.
Underconfidence, on the other hand, leads to mediocrity. It manifests itself as going through the motions, doing things because they’ve always been done that way, and settling for good enough. What’s more, these manifestations of mediocrity can feel like success because there’s no failure. But success is not the absence of failure. Rather, success is achievement — a curve of consistently getting better. When you’re underconfident, there is no curve. Your development is a flat line and it’s impossible to see how much better you could be.
Optimal failure
A former boss of mine tells a story about a sister-in-law who worked for a bank originating loans. During her first year on the job, she didn’t write a single loan that went bad. She was, she she believed, a superstar credit analyst with a 100% success rate.
But when the time came for her first performance review, her manager informed her that she was considered the worst credit analyst at the bank because she had been declining to write lots of potentially good business. If she didn’t have a single loan go bad, it meant she wasn’t writing enough loans. Her underconfidence was leaving money on the table for other banks to take.
In the banking and insurance industries, this is the concept of the cost of risk. While it’s different for different institutions, it’s the threshold for failure an organization is willing to tolerate in order to make sure it is achieving an optimal amount of success. Knowing and writing to your cost of risk is a guard against underconfidence and underperformance. It’s the equivalent of my son going down the water slide knowing that he might get scared and swallow some water (an acceptable cost of risk relative to the reward of an afternoon of fun), but won’t drown (an unacceptable cost of risk relative to that reward).
Making it okay to fail
Failure, however, is a tough pill to swallow and too much of it can break a person or organization. This breakage comes in the form of things like terminated employment, bankruptcy, and injury. This is why it can be difficult for individuals and organizations to devise systems that encourage the right amount of failure.
In schools, for example, most final grades represent an aggregation of an entire term’s worth of work. To earn an A, one has to have been successful at every assignment along the way — and there’s considerable stress attached to acing every one of those mileposts.
This doesn’t seem right. If a student has always succeeded, then that student has not pushed up against the boundaries of what’s possible. So what has that student really learned?
I came around to this way of thinking back in college when I crossed paths with a creative writing professor who proffered a disruptive grading system. Here was the matrix we received on the first day of the class:
The first five assignments were worth a total of one point. The final assignment was worth 90 points. The assignments were all the same length, and we had a week to work on each one. But you could fail the first 11 assignments and still get an A in the course provided you aced the last one.
This was by design. The professor wanted students to feel empowered — overconfident, if you will — to stretch the boundaries of their competence and fail spectacularly on early assignments in order to get as much feedback and learn as much from them as possible. By honing these new skills, it would set us up to ace the final assignment and become better writers in the process.
Some 25% of the enrolled students did not return for the second class. They did not wish to risk their GPAs on a creative writing class with a goofy grading system.
The rest of us dove headfirst into building new skills like iambic pentameter, dialogue without exposition, and using only verbs that were also animals (ex: ferret, grouse, and worm). We were bad at it at first. And while it hurt to get the first zero of my life, I was learning. What’s more, the professor’s framework meant that zero didn’t break me.
Pick your spots
The genius of that system is that it encouraged failure because it made it possible to tolerate the discomfort that comes along with it. If we wish to get better, those are the types of systems we need to be setting up in our schools, sports leagues, and places of work. It’s the idea that you don’t need to appear good all the time, but be excellent when the time comes.
Fear of failure is why my son didn’t want to relinquish his water wings. But with the right incentive and risk management system in place, he climbed to the top of the water slide and jumped down it without hesitation. I watched him whip around the turns and into the tunnel, a big smile on his face. He emerged from the tunnel, hit the water, and went under. And stayed under for one…two…three…
I panicked. But before I could act, he bobbed to the surface — coughing — and kicked over to the wall. It was a clumsy stroke, but he did it and the life guards took no notice.
“How was it?” I asked.
“Awesome,” he yelled, and before I could agree, he was out of the pool and climbing back up the water slide.
