The leadership secret that every top CEO (and gambler) uses to win

Audacity gets a bad name in corporate circles, but not among the folks behind The Audacious Project.

Now in its second year, the TED-backed collaborative funding initiative matches bold thinkers with visionary funders to create moonshot projects with the potential for a massive social impact.

According to the website, “Every year, we select and nurture a group of big, bold solutions to the world’s most urgent challenges, and with the support of an inspiring group of donors and supporters, come together to get them launched.”

Why Audacity is Hard

Audacious projects are often proposed by daring individuals who would otherwise have little access to capital and influence—including getting one million girls into school classrooms, restructuring the debt of island nations, and scrubbing child sexual abuse from the Internet. We love the spirit and substance of The Audacious Project, but there’s a subtext that bothers us: The Audacious Project is necessary because the work it funds and develops is too risky for companies to take on.

Talk about a missed opportunity. More than at any time in history, big and small companies have the power to change the world.

Suppose you could find a way to mobilize Amazon, Wal-Mart, Samsung, ExxonMobil, Daimler-Benz, Disney, and a dozen other corporate titans and get them more focused on solving real problems than maximizing shareholder value. In that case, we’d be well on our way to solving everything from climate change to global hunger, with some time left over to go shopping.

Instead, we’re left with a handful of noble young companies—Patagonia, TOMS, Shady Ray’s, Bombas, and so on—that try to do well by doing good, but their efforts amount to a tiny drop in a giant bucket. They have nothing to lose, so why not be audacious? The mantra is different if you’re a big corporation with many stakeholders. Too risky.

Why Small Companies are More Audacious

Small companies must do audacious things because that’s how they stay alive and grow. But if you’re in the Fortune 500? No, thank you. You take predictability with your scotch and soda.

That’s one hundred percent backward, and it’s why so many old-guard companies like Hilton are having their lunch money taken by upstarts like Airbnb and VRBO. (Remember, the Lilliputians eventually tied the giant Gulliver to the ground.) They’re weighted down by a potentially fatal misunderstanding of what risk and audacity are:

It’s not risky to do something audacious. Real risk occurs when you play it so safely that you never attempt moonshots.

Innovation, change, and growth occurs out on edge, far from the safety of the home office. They happen when programmers and designers and marketers, and VCs are at their best, working without a net on initiatives that matter to them. They’re making up solutions as they go, shattering norms, and inventing things that no one knew were necessary…until they were required. What are they not doing? Thinking about what they have to lose. The minute you do that, it’s game over. You stop thinking about creating the next big thing or breaking ground nobody else has ever broken and start worrying about safeguarding your hoard.

As any gambler can tell you, that’s a sure way to end up standing out on the Las Vegas Strip at three in the morning, your pockets empty, wondering what the hell happened. Professional gamblers know that not taking risks—“playing not to lose”—is the same as losing.

Risk Correlates to Reward

After all, anyone in business or finance knows the simple investing equation, right? Risk correlates with reward. The higher your potential to lose everything, the higher your potential return. That’s why investing in options pays a higher return than buying super-safe but boring Treasury bonds.
Gamblers (and visionary CEOs) know that as soon as you start worrying about protecting your chip stack, you lose your audacious Han-Solo-in-the-asteroid-field moxie. You start playing it safe. You get conservative and careful and lose your edge. The psychological mechanisms behind this, part of the discipline of behavioral economics, are the hot hand fallacy and recency bias. Both will crush you at the roulette wheel and in the corporate board room.

People who believe the hot hand fallacy think that because you won in the past, you will keep winning, so you change nothing but keep betting. But most of the time, past performance has nothing to do with future results, so you’re betting on blind luck. Eventually, luck turns.
Suppose you’ve been running your company conservatively and cautiously while believing that you’re winning because you’re just so amazingly awesome. In that case, you’ll get run over by the first competitor with a product better than yours.

Gamblers also avoid recency bias, which tells us that what’s happened to us most recently is the most relevant and, therefore, the most likely to continue. Have you been getting great cards on the flop? Well, then, you’ll always get great cards on the flop. Do you have no competitors in your space? Then you never will.

Amazon CEO Jeff Bezos hasn’t fallen victim to either problem, and that’s probably why he’s built the world’s most crucial retailer and become the world’s richest man.

Back in 2003, Bezos and his leadership team realized that in making Amazon as efficient as possible, they had become good at running reliable, scalable, cost-effective data centers. Of course, cloud infrastructure as a service wasn’t Amazon’s core business, and we suspect that about 95% of CEOs would have uttered the death knell, “We’re not in that business,” and killed the idea before it got out of diapers.

Bezos didn’t. He and his team recognized a terrible, risky, stupid, insanely great idea when they saw it and, in 2006, launched Amazon Web Services. Today, that outgrowth of the infrastructure management that Amazon was already engaged in any way is a $15 billion enterprise on its own, born out of the realization that assuming you’ll always be on top, is an excellent way of ensuring that very soon you won’t be on top.

So, if taking risks is the minor thing you can do and not taking risks is the biggest threat to your business, how can you move forward in this turvy-topsy world?