Risk Roulette

Businesses fail or flourish depending on how well they understand their risks.

The prospects of entrepreneurial ventures and established businesses do not depend on their leaders’ willingness to expose their companies to risk. Instead, businesses fail or flourish depending on how well their leaders understand the risks they take (or decide not to take).

Jeff Bezos understood the risks he was taking when he quit his job at a New York hedge fund in the early 1990s and started a business selling retail products on the internet. Bezos said the decision was easy. He realized that he would regret not starting the business more than he might regret starting it and failing. The online retailer he launched, Amazon, is now worth more than $1 trillion.

Howard Marks, a successful investor who cofounded Oaktree Capital Management, says fully comprehending risk requires being aware of the impact of rare, not average, outcomes. He notes that a six-foot-tall man can drown in a stream with an average depth of five feet – if the depth ranges from one foot along the shallow edges to ten feet in the middle.

Advocating a balanced approach to risk, Marks turns to tennis...