Tuesday, January 21, 2014

Calculated Risk

Betting that a person wearing a watch has it on the left wrist is a pretty safe bet. Most people are right-handed, and most people wear a watch on their non-dominant hand. With that said, the bet is not a guaranteed victory; it's a calculated risk.

If you wanted to guarantee that you didn't lose money, you would simply not bet in the first place. But since the odds significantly favor one side, then the risk is worth taking because, on average, it will yield profit.

Humans really suck at risk. Our brains are programmed to think of everything as a sure thing. Whatever we are presented with is either guaranteed to succeed or guaranteed to fail. Something with an 80% success rate is guaranteed to succeed. Something with a 20% success rate is guaranteed to fail. You may be telling me how incredibly wrong I am with those sentences, but it's really how most people's brains look at that situation in real life. Very few people would bet money on something with a 20% success rate; at that point, it is functionally a 0% success rate in the mind.

The essence of a true calculated risk is recognizing that there is a very real chance of failure, and having a plan to deal with that possibility. Otherwise, you're really just assuming a sure thing.

No comments:

Post a Comment