1.2 Risk and Uncertainty

You probably know two different types of people. You know kinds, the kind of people who are always saying, you know these guys should do this over here. You know what would be a great idea is if they changed this like this or if. If they came up with that product or service and you know other people who maybe are as vocal, maybe less vocal, but the difference is, these people are always engaged in something, they’re always actually doing something, not just talking about it, right? This would be more entrepreneurial, right? I always say creativity is not entrepreneurial. We have no use for creativity in business. What I have use for in business is innovation. Creativity is just an idea, it’s a thought. Innovation is the application of creativity. This is what we need in business. This is what defines an entrepreneur, right? Is innovation, acting on creativity. So why do entrepreneurs act on their creative ideas, where other people don’t? This is, takes us back to, to, the very basis of entrepreneurship, any time you bring up entrepreneurship in a group, someone is going to bring up the word risk. Oh yeah, entrepreneurs those risk seekers. I am too risk adverse to be an entrepreneur. I am not risky enough to be an entrepreneur. I’m an entrepreneur, I’ve always been an entrepreneur. I don’t view myself as being ultra risky, all right? I don’t think of myself as a very risky person. So, what’s this thing about risk in the entrepreneur? I want to talk about risk and uncertainty. Risk is really another way of expressing what’s known as uncertainty, things that we’re not certain about. We’re not certain about the future, and why are we not certain about the future? We’re certain because, well, the future’s the future. No man knows the the future. But we can have a better understanding of the future than other people, depending on our level of knowledge and education. You see, the only way that I can possibly know what the weather might be like tomorrow is by watching the weatherman on TV. Cuz I don’t have enough knowledge about weather and weather patterns to, to take me any further than that. But the man on TV who might actually just be an actor is at least getting his information from well informed people who study meteorology, who study weather, who study weather patterns. And on top of that, they have access to satellites and satellite info that can show you. Things that are coming. In fact, on my iPhone now, I have access to satellite info, and that actually reduces my uncertainty, Right? It has removed ignorance and reduced uncertainty. Although I may not be able to tell you what the weather will be like next week, right, I can tell you in the next few hours cuz maybe I can see the, the weather system moving in. On, on, on, on the satellite. Now, as that system approaches and I say oh, it’s gonna rain in an hour, an hour from now, it doesn’t rain. What happened? I look back at the satellite, and oh, oh, the, the, the weather pattern that was coming shifted. It went somewhere else. I didn’t know it was going to shift. I didn’t know enough about it. I could only see what my satellite was telling me. But if I had had more knowledge of what was going on, like the weatherman might, like the weather department might, they may have said no this is going to be blocked by this mountain range, or we’ve got some air coming down from here. And, they would have less uncertainty about the future. Right, so I want, I want to really drive that home with you because uncertainty is a product of ignorance. So in entrepreneurship, we deal with uncertainty, and in the context of entrepreneurship, we deal with three types of uncertainty. We do, deal with what we call state uncertainty, effect uncertainty, and response uncertainty. Okay? State uncertainty. State uncertainty is basically we are uncertain about the state of things at a future time. Right? Simply the way things are going to be. We’re uncertain about that. There’s effect uncertainty. We are uncertain about the, the effect that our actions or unknown actions might produce. And there’s response uncertainty. We’re also uncertain about response of the market. Or other forces, but, but primarily usually of the market in response to whatever action we perform, right? So how are things gonna be? How are things going to be affected by what we do and what is the response to our actions gonna be? These are basically the three main uncertainties. Now these uncertainties manifest themselves as ignorance and doubt. Okay. So we are ignorant of certain things and doubtful of certain things because we are simply uncertain about the future. So the first thing an entrepreneur needs is an opportunity. Are opportunities identified? Are they created? It’s an argument we’re not going to get into. What we do know is we need an opportunity. And once we get an opportunity, we as entrepreneurs have to evaluate that opportunity in a meaningful way. Opportunity of evaluation is a two step process. There is the personal evaluation. Of the opportunity. And then there’s the more formal evaluation which is the feasibility study. Now the first part, personal evaluation, that’s also a two step process. You see as we go through life, us entrepreneurs, we identify an opportunity or create an opportunity. We see that there’s a potential opportunity there. And the first thing we do is we start thinking about it, we probably do a little research, whether actual physical research or even just cognitive research. As we process the possibility of this, of this opportunity, we start looking at what information we have, what connections we can possibly make or what connections exist. That make this opportunity profitable, okay? Now, it’s important to understand that the personal evaluation and the feasibility study are not mutually exclusive. Sometimes very early on in the personal evaluation stage we might sit down at a computer, open up Excel, throw in some numbers, start playing around. Hey, I wonder if you could make money off of this. As we do this, we actually reduce we reduce uncertainties, right? We reduce state uncertainties, affect uncertainties, response uncertainties. We probably never eliminate them, but we do reduce them. As we reduce these uncertainties, we reduce. Our ignorance. As our ignorance is reduced, we start to see an opportunity. This is what we call a third person opportunity. We start to realize that there’s money in that opportunity, or there’s a value in that opportunity for someone, maybe not me. Maybe I’m the last person on earth who wants to engage in that opportunity, right? But I recognize, you know what, there is value there for someone and I’ve evaluated thousands of these opportunities in my time. And I know there’s value there I’m just not interested, not my cup of tea, not the kind of venture I want to engage in. Right? We reduce uncertainties, we reduce ignorance. And we reveal a third person opportunity. Then once that opportunity is revealed we start to think about it more personally. We’ll, could I do that? Would I wanna do that? And we start again, reducing. State uncertainty, effect uncertainty, response uncertainty, in terms of us and our actions and our lives. And at some point we might realize, yeah, I want to do that. Yes, I can do that. Maybe at first we think, man, there’s an opportunity there, but I could never do it. But as we consider it more, as we maybe get online and educate ourselves more, or take a, a career readiness course, we realize, you know, I can do that. You see, we’ve just elevated the third person opportunity into a first pah, person opportunity. This is no longer just a good business idea. This is a good business idea for me. I now have a first person opportunity. An opportunity for me that I can take and start to work with. What I’ve done is I’ve reduced ignorance. To have a third person opportunity and then reduce doubt to get a first person opportunity. So you’ve got your first person opportunity, what are you going to do now? Well now you’ve got to take that second step into the formal evaluation process or the feasibility study. Feasibility study. Is really going to involve looking at the numbers, getting the numbers, getting them all together, and you might think, wait a second, that’s where this all ends. The doubt reenters. I don’t do numbers. I don’t do accounting. You can do numbers. You can do accounting. We’ve got Excel to help us and that’s what we’re gonna look at in the next section. We’re gonna look at entrepreneurial finance. How do we entrepreneurs who may or may not come from a financial background, how do we evaluate this business in terms of proper financial technique and terms of the numbers? We’re gonna get on to that in the next module, and I look forward to seeing you then.