And the risk of failure
This is an update to an essay I originally wrote a few years ago. It’s a mental model I keep returning to over and over again, especially in light of recent events.
We often judge opportunities based on the potential benefit or “upside” as it’s usually called. If we do ‘X’, we get ‘Y’. Typically, the risk we consider is not getting ‘Y’ if we fail to accomplish ‘X’.
I’ve come to rely on an additional layer to judging both opportunity and risk. I call it the “cost of failure”: what’s the cost of not getting ‘Y’?
It’s quick, easy, and now one of my most important evaluation tools.
Failure is always an option
A pessimist is someone who doesn’t just consider the chances of something going wrong; they overestimate it, often to the extreme.
You don’t have to be a pessimist to factor failure into your thinking. I’d argue everyone should give the chances of something turning out poorly some consideration.
I’m no pessimist, yet I do this all the time. The difference is I try — as best I can — to make an objective judgment of the actual risk. Risk is always there. It may be small, it may be large, but the risk of failure is always present. What’s important is that I acknowledge it.
And then I do one more thing.
Failure can be costly … or not
What happens if I fail? What happens if something goes wrong?
What does failure look like?
If the results of failure are inconsequential, then the “cost” of failure is low. If so, perhaps the risk is more readily worth taking. On the other hand, if the results of failure are painful even to contemplate, the “cost” of failure is high. Unless the chances of success are also high (and the rewards of success are worth it), the risk might be best avoided.
It’s easy to visualize success, but all too often we ignore what failure might look like. And yet that’s exactly what we need to do when making decisions about our actions and the opportunities with which we’re presented.
Sometimes failure’s just not that bad.
And sometimes it is.
This isn’t about learning from failure
It’s popular to consider failure a good thing. Popular self-help and business advice almost always includes statements to the effect that one should always see failure as an opportunity to learn. “First Attempt In Learning” and all that.
I don’t disagree, but that’s not what I’m talking about. You can learn from even the most catastrophic and costly failure. In fact, it’s probably most important to learn from your most costly failures so as to avoid them again in the future. Almost any failure can teach us a lesson of some sort.
Lessons are learned after the fact. I’m proposing you consider failure and its cost before.
Failure, large and small
Even though I’m an entrepreneur and this kind of thinking applies to almost everything I do in business, “the cost of failure” has practical application almost anywhere.
Should we put the dog in a crate when we leave the house? Well, the chances of something bad happening are very, very low, but that something bad could be very messy. The cost of failure is high. Into the crate he goes.
Should I make a separate trip to carry the cheesecake, or can I balance it with the other things that also need to be brought from one room to another? Once again, the chances that I’ll drop it are fairly low (depending on who you ask 
). But the result of such a drop would be pretty painful, in several ways. Thus, the cheesecake gets its own, dedicated, two-handed carry.
“What’s the worst that could happen?” is your guide, followed by “how costly would that be?”
Sometimes the worst that can happen is very, very insignificant. Fantastic, full steam ahead!
Sometimes it’s not. And that’s worth factoring into any decision.
Essay originally posted June 22, 2018, and updated May 30, 2023.