I’ve been reading authors like Seth Godin about how the lizard brain creates so much fear in us, and the wisdom of going ahead with things (like new product innovations) that scare the lizard brain to death.

I’ve also been reading about what causes people to lose a lot of money in business and in markets. Avoiding large losses appears to be more important than having the right analysis or trading strategy. There’s a psychology to avoiding large losses, and it has to do with healthy fear.

I think the lizard brain is right about something here. There is a skewness to risk that we are intuitively aware of.

Risk is skewed like this: There’s such a thing as a permanent loss, but there’s no such thing as a permanent gain.

If a gambler loses all his money, he doesn’t get to play anymore. He doesn’t get the benefit of the next random upwsing, because he is out of the game. This applies even more strongly to sheer physical survival (and this is what our lizard brains are obsessed with). If you are dead, you don’t get the benefit of the next opportunity to pass on your genes. If your business is bankrupt and shut down, you don’t get the benefit of the next big sale that might come along. There’s no upside opportunity when you are out of the game.

But the reverse is not true. No matter how big the gambling win, how not-dead (healthy?) a person is, no matter how large a sale a business just landed, those gains are still subject to downside risk.

As much as I can, I want to avoid risks in life and business that have a measurable chance of taking me out of the game. I won’t make all-in bets on new products or expensive marketing if I have a good, lower-risk alternative. I won’t borrow so much that I might get shut down by the bank if business dips.

Yes, we must learn to use our rational brains to tell the difference between dangers that could seriously hurt us, and dangers that can’t. (Public speaking for example terrifies the lizard brain but falls under the latter category.) But as we evaluate risk in business I think it is wise to account for the skewness that comes from the risk of being taken out of the game. I think the lizard brain is right about that part.

One qualifier: Although non-death losses like bankruptcy can take me out of the game, they aren’t truly permanent of course. The gambler can work and save up some more gambling money. The entrepreneur can raise new funding and try again. So the lizard brain is more afraid of these events than it needs to be. Nonetheless the skewness I’m talking about is real, and I think being taken out of the game, even non-permanently, is a loss worth taking extra precautions to avoid.

When an employee is falling short of performance expectations, the reason(s) fall into only a few categories:

• Clarity: Does the employee know what the expectation is? Does the employee know what his/her current performance is relative to the expectation?
• Character: Does the employee have the personality features and basic life skills required to meet the expectation?
• Competence: Does the employee have the specific or technical skills required to meet the expectation?
• Resources: Does the employee have enough time, tools, people, etc to meet the expectation?
• Motivation: Does the employee have the motivation required to meet the expectation?

Each of these requires a different type of action by the manager. Rather than being vaguely bothered by the situation, get specific and face the reality of what needs to happen in one or more of these five areas.

A few weeks ago I heard Seth Godin say, “Someone is going to put you out of business, it might as well be you.”. He was talking about how change and innovation will put every business out of business in time. So change and innovate your own business. Make what you are doing now obsolete by doing something better, before someone else does. Fix it even if it ain’t broke, and you can beat the unsettling, inevitable decline of what you do now. I love the proactive, make-your-own-destiny attitude in this.

This book is about mistakes we make in business when we have a lot at stake emotionally. It’s a fairly short and intriguing story about the life of Jim Paul, a kid who grew up poor, became a very successful commodities trader, then lost it all. He writes with unusual humility and candidness. The mistakes he made are mistakes I could see myself making in business, so I valued the chance to learn from his experience.

I think the book is especially valuable for entrepreneurs, because it’s impossible not to have a lot at stake emotionally in a self-started business. It’s really not a book about making money, or about trading in the markets, it’s about the psychology of losing.

Here are a few key points I took from the book:

• It’s very dangerous to think you are successful because there is something a little bit special about you, that you are somehow a little bit charmed. One reason this is dangerous is because it puts your ego on the line when your success takes a downturn, and with so much ego on the line you’ll probably do expensive things to defend it.
• There’s a difference between “prophet motive” and “profit motive”. “Prophet motive” is when we are in something to prove that our prediction was right. This means if we get out, we have to admit we were wrong, which might cause us to stay in too long. He says don’t make it about being right in the first place.
• It’s essential to form a predefined exit strategy before you get into the emotional middle of a venture. “If we lose x number of dollars, we shut down the business.” “If we don’t return to profitability within x months, we’re done.” “If my investment idea loses x% I’ll abandon it.” Many people take losses much bigger than they would have been willing to allow had they written an exit strategy in advance.

This book was thought-provoking for me and I think it’s worth a read for anyone who’s in a position with something to lose and responsible for making decisions about what to do next. Here it is on Amazon.

There are some things money can’t buy, but there are lots of people willing to offer you those things for a price.

I’m talking about things like… Respect. Sex appeal. Peace of mind. Belonging. Identity. Camaraderie. Youthfulness.

I’m not saying the MasterCard commercials are wrong when they imply that a series of purchases (gas money, baseball tickets, hot dogs, and popcorn) can contribute to something deeper (a father/son bonding road trip to a big game). I think they’re right. Such an experience does involve spending money, and it can contribute to something deeper. But it also requires a relationship foundation and a certain quality of interpersonal interaction to make it work. The trip requires money, the relationship requires an investment of work and time over thousands of experiences and conversations.

Don’t get me wrong. I gladly spend money, sometimes lots of money, on things like books, teaching, or experiences that I believe will contribute to my relationships, deeper needs, and higher goals. I’m not telling you to be frugal. I am suggesting though, that a fast red car may not actually resolve the deeper issues behind a mid-life crisis.

These things that money can’t buy are found through a longer, more internal process, involving relationship building, personal growth, and perseverance. Don’t be drawn into trying to buy those things outright. That is very expensive and ultimately counter-productive. Accept that there are no shortcuts and engage in the longer process.