The 12-Week MBA Chapter 4: Risk - Why Predictability Is Worth More Than Growth

Here is something that surprised me in this book. You can actually create value without making a single extra dollar. How? By making your business more predictable. Chapter 4 explains why, and it changed how I think about risk.

This is post 4 in my 12-Week MBA retelling series.

A Business Is a Bundle of Promises

The authors start with a simple but powerful idea. Forget about thinking of a company as a collection of products, or employees, or offices. Instead, think of it as a bundle of promises.

A company promises customers that goods will arrive on time and work as expected. It promises employees that paychecks will show up. It promises suppliers that bills will be paid. It promises creditors that loan payments will be made on schedule. And after all of those promises are kept, there is a final promise: something will be left over for shareholders. That something is profit.

Risk, in this context, is simple. It is the chance that some of those promises will be broken. Not because anyone wanted to break them, but because the future is uncertain and nobody knows what will happen next.

Promises, Expectations, and Broken Hearts

We all make promises. Sometimes we do not even realize we are making them. The authors have a funny example. You tell your nine-year-old “you are going to like the Avengers movies.” Five minutes before bedtime, the kid hears that as “we are going to watch one right now.” You created an expectation without meaning to.

Businesses do the same thing. Everything a company says, and does not say, creates expectations. Contracts are the most formal kind of promise. They are a company’s way of saying “cross my heart.” But even contracts have limits. Every year, thousands of businesses have to break their promises and declare bankruptcy, often because of circumstances they never saw coming.

This is why investors can never take any promise at face value. They have to discount it. They have to ask: how confident am I that this company will actually deliver what it says?

Meet Ingrid the Investor

The authors introduce an investor named Ingrid to explain how this works in practice. Ingrid is considering investing ten thousand dollars in a food truck. She maps out different outcomes and how likely she thinks each one is:

• Catastrophic (lose everything, minus ten thousand): 10% chance
• Disappointing (break even, zero dollars): 50% chance
• Satisfying (make one thousand): 25% chance
• Truly amazing (make five thousand): 10% chance
• Beyond wildest dreams (make fifty thousand): 5% chance

Using basic math, she calculates the expected value of this investment. You multiply each outcome by its probability and add them up. The answer comes out to $2,250.

Now here is the important part. That $2,250 does not mean she will actually make that amount. It is not the most likely outcome. In fact, it is not even one of the options. It is a weighted average that helps her compare this opportunity against other options. By itself, the expected value does not tell you much. It is a comparison tool.

So should Ingrid invest? That depends on things the math cannot capture. How much would losing ten thousand dollars hurt her? How much would an extra five thousand change her life? Expected value helps, but it is not the whole story.

Same Investment, Less Risk, More Valuable

Here is where this chapter gets really interesting. The food truck entrepreneurs come back to Ingrid with new information. They found a truck they can rent instead of buy. They did more market research and found more potential customers. They discovered ways to cut costs.

The revised deal looks like this:

• Worst case (minus five thousand instead of ten thousand): 10% chance
• Break even: 24% chance
• Make one thousand: 25% chance
• Make five thousand: 40% chance
• Make fifty thousand: 1% chance

Here is the key detail. The expected value is still exactly $2,250. The same number. But Ingrid now feels much better about this investment. Why?

Two things changed. First, the worst-case scenario got cut in half. She can only lose five thousand now instead of ten thousand. Second, the outcomes are clustered more tightly around the positive results. There is a 40% chance of making five thousand dollars, up from 10%.

The moonshot outcome (fifty thousand) became less likely, dropping from 5% to 1%. But Ingrid does not care. She would rather have a realistic shot at a good return than a tiny chance at a massive one.

This is the fundamental lesson about risk: you can create value by making outcomes more predictable, even if you do not change the expected payout at all.

What Actually Changed?

Think about what the food truck owners did. They did not promise more money. They did not find a way to make better sandwiches. They did three practical things:

1. Reduced the upfront investment by renting instead of buying the truck
2. Gathered better data through more market research
3. Found ways to cut costs without hurting quality

All of these made the business more predictable. Less money at risk. Better understanding of the market. Tighter control of expenses. The expected payout stayed the same, but the confidence level went way up.

And that is exactly what value creation looks like from a risk perspective. You do not always need bigger numbers. You need more believable numbers.

Why This Matters for Every Manager

This is not just about investors and food trucks. If you manage anything, you deal with risk every day.

When your boss asks how long a project will take, you are making a promise. If you say two weeks and it takes four, you destroyed confidence. If you consistently deliver on your estimates, people trust you more. That trust has real value, even if the projects themselves are the same size.

Companies work the same way. The authors point out that a big part of management is about shaping investor confidence. Both through what managers say and what they do. Words and actions together create or destroy value by raising or undermining confidence.

A CEO who promises huge growth and then misses targets does more damage than a CEO who promises modest results and delivers. It is not about the size of the promise. It is about keeping it.

The Tools That Build Confidence

The chapter gives a quick preview of what is coming next in the book. There are three main financial statements that help investors gauge how confident they should be:

1. The P&L statement (profit and loss) - shows if the company is making money
2. The balance sheet - shows what the company owns and owes
3. The cash flow statement - shows actual cash moving in and out

Together, these three documents tell the story of a company’s recent performance. And that recent performance is what shapes investor confidence in the future. We will dig into these in the upcoming chapters.

The Limits of Prediction

The authors end the chapter on a humble note. Even with all the math and probability tools available, the future stays uncertain. They quote the famous economist John Maynard Keynes, who said that real uncertainty, like the prospect of a war or the fate of a new invention, has “no scientific basis on which to form any calculable probability whatever.”

But we still have to make decisions. We still have to act. As Keynes put it, the necessity for action “compels us to do our best to overlook this awkward fact.”

Or in the authors’ words: business will never be truly boring.

Key Takeaway

Risk is not just about what could go wrong. It is about the gap between what you promise and what actually happens. Investors value predictability. Two investments with the same expected payout are not equal if one has wildly scattered outcomes and the other has tight, reliable ones. You create real value by reducing uncertainty, not just by chasing bigger numbers.

For me, the biggest insight from this chapter was this: confidence is a form of value. When you make your business, your projects, or your promises more predictable, you are not just reducing risk. You are literally making them worth more.

Book: The 12-Week MBA by Nathan Kracklauer & Bjorn Billhardt | ISBN: 978-0-306-83236-9

Previous: Chapter 3 - Growth

Next up: Chapter 5 - The Balance Sheet Part 1 - Understanding what a company owns and owes.

Part of the 12-Week MBA retelling series