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Are you a victim of probability neglect?

Tuesday, December 22, 2015 - 09:00
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There is common phrase thrown around in business: If you aren’t growing you’re dying. In business there are two types of growth, organic and inorganic. Organic growth refers to increasing sales internally, generating more revenues with your existing business assets. Inorganic growth refers to growing sales by expanding to new locations, acquiring other businesses in the industry, and sometimes even expanding outside of your industry.

A common misconception is that organic growth is less risky and less costly than inorganic growth. But as humans we are actually inherently bad at assessing risk. Referred to as probability neglect, we assume that common activities we engage in are inherently safer and less risky than less uncommon activities.

A common example of this bias is how most of us feel about driving a car compared to flying. For most of us driving a car is an everyday event, something we think very little about. But flying is uncommon relative to driving, even for the heartiest road warriors among us. Most of us express at least some level apprehension while flying that we do not experience while driving.

But the reality is that driving is much more dangerous than flying. In fact, you are 600 times more likely to be killed in a car on your way to the airport than on a plane itself. Yet we feel that driving is much safer than flying.

Business growth is the same. Many of us feel apprehensive about growth, especially inorganic growth. The prospect of buying another business can be intimidating. And that is understandable, buying a business is not a common activity for most of us. Most of us do not buy businesses every day. But inorganic growth can actually be less risky and less expensive than traditional organic growth.

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