How To Increase Your “Rewards-To-Effort” Ratio

First of all, happy new year!

One of my heroes is Fred Wilson, a venture capitalist who has invested in companies such as Twitter, Etsy, and numerous other internet successes. In addition to being an excellent businessman, Fred has a popular blog and spends a substantial amount of time with his wife and three children. As if that weren’t enough, he somehow finds time to hike, ski, and travel around the world.

How does he accomplish so much?

To me, Fred Wilson is a classic example of someone who has maximized his “rewards to effort” ratio. Simply put, Fred focuses his time and energy on activities that will pay off big-time – whether that’s in his business, his family life, or in his personal adventures.

Fred isn’t the only successful person following this recipe. Most rich people are extremely good at identifying where their time and money is best spent…and here’s how they do it:

Take a look at the graph below: You’ll notice that there are four quadrants: experiments, should-haves, black holes, and home runs.

The secret to success is to make your decisions along the red arrow above: focus on experiments and home runs while avoiding the should-haves and black holes.

The Experiments

The Experiment is the classic low-effort, low-return situation. Most of the choices we make in life are experiments – things like going on a first date, trying a new food, or signing up for a trial membership at your local gym.

Experiments are a good thing because they help you gather information about how things are working out. Although most experiments don’t turn out well, they’ll help you make easier decisions at a low cost. For example, if your first date goes badly, you never have to see the other person again – you’ve only invested a few hours of your time. Similarly, if you try a new food and don’t like it, that’s it – you never need to try it again.

So clearly there’s not a whole lot of downside if your experiments go badly. But what happens if your experiments are successful? You could learn something new; maybe even hit a home run, a major success that more than makes up for any small losses along the way. So the upside to experimenting is that you can discover new wins at a very low cost.

What happens if you never experiment, never take even the tiniest bit of risk? Simply put, you’ll miss a lot of opportunities – and you’ll find yourself saying “I should have” an awful lot. So don’t be afraid to take a few chances – just be aware of what you’re doing and be sure to limit your losses.

The “Should Have”

“I should have tried to make the relationship work; I think it had a shot.”

“I should have studied harder for that test, but I didn’t feel like it at the time.”

“I should have danced around like a wild monkey while yodeling, but now that chance is lost forever!”

Ok, I’m kidding about that last one. But do the others sound familiar? We all have things that we “should have” done – whether it is asking out the girl of your dreams or taking more initiative to find the perfect job. These are the “should-haves” – the scenarios that would have given you amazing returns…if you’d just put in the effort or taken a chance. Instead, they end up being wasted opportunities.

“Should Haves” are something that you should avoid. If something has high potential for reward, then go for it! Don’t let anything – or anyone – stand in your way. We don’t get those high-return chances very often, and it’s important to take full advantage of them when we do.

So how do you avoid the “should-have?” The first step is to assess how important something is to you. Keep in mind that most great things require a lot of effort – and you shouldn’t be working really hard for something that you don’t care for. Focusing your effort on the few things that really matter will help you as you move forward.

Somewhere down the line, things start getting tough. The initial excitement has worn off, and you start to second-guess your decision. This is the time that most people give up. Take a moment to remember your thoughts in the first step. If this is important to you, you’ll probably regret it. You don’t want to say that you “should have” put in the effort when things got hard.

Eventually, with effort, talent, passion, and a little luck, you’ll start seeing some serious results. This is when you know that you’re on your way to a home run. But don’t stop now! Keep building on your success; results will only snowball from here.

The Black Holes

Along with the “Should Have,” the Black Holes are something you want to avoid. We get sucked into a black hole when we put a lot of effort for very little in return. Some examples include a failed long-term relationship or a dead-end career.

Black holes happen when we get comfortable or are afraid to take a loss on something. We think that we’ve already made an investment, so we are entitled to some results. This is not true. Effort in itself doesn’t guarantee results. Instead, it’s effort in the right activities – the things that are working – that will ultimately yield the home runs. Otherwise you’re just throwing good after bad.

But what about all the time and effort that you’ve already put into something? If you give up, that effort will be wasted.

Not true. The effort you have already put in is called a Sunk Cost. You aren’t going to get it back whether or not you put in some additional effort.

For example, let’s say I go on 10 dates with a girl. After the ten dates, I realize that’s clearly not working out. I definitely shouldn’t have let it go on this long, but that doesn’t mean I should continue the relationship. That wouldn’t be fair to either of us. Instead, the best thing to do is to let go before things get even more out of hand.

Here are some of the keys to avoiding black holes:

Have a plan. People get caught up in bad situations when they wander around aimlessly. Your chance of getting sucked into a black hole is much higher if you don’t have some sense of direction. Your plan should include your goals, metrics, and obstacles.

Know where you stand. In any situation, it’s important to take time to assess how things are going. One way to do this is through reflection.

Be able to admit you were wrong. This might be the hardest thing for any of us, but it is an important step. We all make mistakes, but they don’t all have to be painful and expensive.

Have the discipline to cut your losses. If something isn’t working out, don’t be afraid to let go. It will save you time, energy, and money over the long run.

The Home Run

The Home Run is the ultimate reward – that rare and wonderful time when we pour our heart into something and achieve results that exceed our wildest expectations. Home Runs are that perfect combination of effort, skill, and a little bit of luck. The possibility of hitting a home run is what keeps us motivated; it’s the reason that we take risks, work hard, and try new things.

It all sounds wonderful. After all, it’s the American Dream, the classic “rags to riches” story…except for one little thing….

No one hits home runs all the time

Seriously – it just doesn’t happen that often! Most new products fail. Most relationships fall apart. Most investments produce sub-par returns. It doesn’t matter whether you’re rich, poor, married, or single, you’re just not going to win most of the time.

So then how is it that some people seem to “have it all” while others are barely getting by?

The secret is in maximizing the opportunity

The opportunities don’t come along often, and when they do, you need to swing for the fences. Home runs represent those rare times where you can get a TREMENDOUS return for your efforts – and the way to do this is put as much high-quality effort as possible. This involves making compromises and sacrifices in the short-term in order to achieve long term success.

One great example of this is Tim Ferriss, author of “The Four Hour Work Week.” The book preaches the concept of lifestyle design – the freedom to work a few hours while living the life of your dreams. There is no doubt that Tim is successful enough to do whatever he wants, but he didn’t get there by working four hours a week. His first company, BrainQuicken, took years of 80 hour workweeks to get off the ground. Tim almost went bankrupt in the process, but his perseverance eventually led to a huge home run.

The success of the book was no different. Tim created a unique niche – the concept of lifestyle design – and proceeded to completely dominate the space. In fact, I’ve never heard of anyone working harder to promote a book, and it paid off: The Four Hour Work Week is one of the longest-running New York Times Bestsellers in recent history.

How do you plan to increase your “Rewards-To-Effort” Ratio?

4 Responses to “How To Increase Your “Rewards-To-Effort” Ratio”

  1. Gordie says:

    Hi Vik,
    My goal is to make money online by helping people through personal development, but I think when I first blogged, it became a black hole. I was putting in lots of time an effort and got no financial return for it. So, I took a 9 month hiatus and just relaxed and studied. Now I've just got back into blogging and I have a plan to monetise. I think this time aruond I should be able to avoid the blackhole. :)

  2. The key really is leverage.  Once you have leverage, anything you do will be magnified!

  3. [...] Pick Your Battles: You can’t win every fight. Don’t be afraid to quit on stuff that isn’t working out – but make sure that your decision is objective and not just based on something being “too hard.” This can stop you from being sucked into some black holes. [...]

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