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Having a Good Sense of What's the "Worst Thing That Can Happen" if Your Business Fails

The second activity or task that helps people set aside loss aversion and the endowment effect and objectively assess whether starting a business is right for them is having a sense of "what's the worst thing that can happen" if the business they're contemplating fails. This activity is not meant to encourage people to be fatalistic, but to develop a reasoned notion of the actual "life risk" involved with starting a particular business. Even if a business endeavor itself is risky, the broader question is how much risk starting the business actually has in the broader scope of a person's life. For example, Michael Dell, who dropped out of college to start Dell Inc., explained, "The opportunity looked so attractive, I couldn't stay in school. The risk was so small. I could lose a year of college."10

There are two ways that people frame the issue of "what's the worst thing that can happen if my business fails." The first is to objectively assess the risk of starting the business within the context of their lives. For example, many people start a business part-time before committing to it full-time. In these instances, if the initial results of the business are disappointing, a person can drop the business before she gives up her job. Similarly, in a two-wage-earner household, one spouse can keep his or her job while the other starts a business, and if the spouse that remains in a traditional job is able to cover the family's living expenses, collectively the couple has less risk. This sentiment is affirmed by Manoj Saxena, the founder of Exterprise, a company that helps others build online marketplaces. In response to a question pertaining to the risk involved with starting his business, Saxena said:

  • "Second, I had the financial backing in the form of my wife who was working at IBM and had the ability to support our family. I knew I wouldn't be forced to eat Ramen noodles to survive; we had income coming in that allowed me to focus on Exterprise."11

There are other types of businesses that objectively have little risk. Examples include home-based eBay businesses and direct-sales businesses, like Tupperware and May Kay, where the upfront investment is relatively low. Many people who are otherwise risk-averse have no problem starting these types of businesses because the business can essentially be suspended at any time with little or no cost. Other people lower the risk associated with their businesses by relying strictly on their own funds and operating in a very frugal manner.

The second way people frame the issue of "what's the worse thing that can happen if my business fails" is to fix in their minds a fall-back position if their businesses fail. This sentiment is often prevalent in people who have skills that are in high demand, like engineering or computer programming, and intuitively know that if they leave their employer on good terms to start a business, and the business fails, they will have little trouble reentering the workforce. This type of outlook is also prevalent among younger people who see their whole lives ahead of them and aren't afraid of starting over if a business endeavor fails. This view is expressed by Joyce Rita Hazan, the founder of Rita Hazan Salon. When asked about the risk involved with her business, Hazan said:

  • "I didn't think about it [being a risk]. I thought, 'What's the worse thing that can happen?' So I lose everything, and I can move in with my mom. What do I have to lose? Money? Big deal. I can make that again. I'll still have a roof over my head and people who love me."12
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