Worst Case Scenario Analysis

August 14, 2014

in Uncategorized

Today I met with some entrepreneurs in an EO forum. As we were discussing things, I realized that it is not uncommon for entrepreneurs to cycle through periods of personal financial highs and lows.

What happens is that the entrepreneurs make a lot of money and build something that is booming. Then something happens to the business and they use personal money to keep it alive. Maybe a reverse mortgage. The entrepreneur does not want to see their startup baby die and is always a believer in themselves and their startup.

Sometimes this bet does not pay off and they lose everything.

Other times, entrepreneurs take risks to grow their business that ends up tanking the rest of the success they have made. Maybe taking out large loans with personal guarantees and falling flat.

In any case, one entrepreneur today mentioned that he always thinks about the worst case scenario whenever making big decisions. He needs to be okay with the worst case scenario. I think it is a valuable exercise to think through worst case scenarios. It can be a tough pill to swallow even in the mental exercise of thinking through it, but it is better than blind optimism.

What are your thoughts on worst case scenario analysis?

  • gallagher

    cost = P(failure) * [ financial_cost + emotional_cost ^ 10 ]

    wallets are one thing, but people are another

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