The Timeless Concept of Risk And Reward In Decision Making
I was going through my emails this morning and saw this question. I knew I had to share my opinion on the vital points raised —risk and reward. The concept of risk and reward has been around for as long as the world has existed. It's a part of our lives even when we don't realise it. Our actions are guided by these two terms in the pursuit of our objectives.
Image: Towfiqu Barbhuiya via Unsplash
Every step we take, every choice we make, every action we execute are centered around risks. There is nothing on earth that is risk-free. From relationships to careers, family, travels, education, business, inventions and so on, they are all surrounded by risks. Some risks may weigh more than others. Some risks may be heavy while some may be mild.
Self preservation makes us prefer things that are less risky, meaning we care about our lives and would not want to get hurt or lose it. Despite this popular view, we have some people who would go for the high stakes. They do not care how dangerous the risk is, their eyes are on the prize (reward) and so they would push through the risk to get what they want.
Then we have a small percentage of people who would rather stand aloof or sit on the fence and remain stagnant, unwilling to take any risk for fear of losing what matters to them. This group does not care about the rewards, even though they may desire it. The reward is not worth the risk or they rather have the reward for free, without taking the risk. Is there anything free in this world? For these people, life stands still for them.
Question: Which of these groups of people do you belong to?
From the main questions, I see two distinct groups of people: the quick-to-act/impulsive people and the slow-to-act/careful people. There are situations that call for impulsive (dive in) action while some require us to take a moment to calculate the risk and reward before acting. Still, it's important to consider the risks and the reward before taking any action.
We should consider questions like:
- Is the risk worth taking?
- Will the reward cover the risk?
- And will there still be something extra left over from the reward (profit)?
Image: Firmbee.com via Unsplash
Applying the concepts to business and investments, a large percentage of people consider the worth of the reward before investing. In the area of cryptocurrency, due to FOMO, some people 'dive in' without considering the risk-reward and most times, it often leads to loss.
Guided by our answers to the above questions, we are prepared for whatever the rewards may turn out to be. Most times, I consider the risks and rewards before I make any decisions. The times I dived in, the risks were great and the rewards, unsatisfactory such that I wished I had not been impulsive.
To avoid pitfalls, we must never stop learning and patience is key. Let your actions be guided by due consideration of risks and rewards because the outcome is what determines your success or failure in life.
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The concept of risk/reward sounds quite simple. And as you say, many of us intuitively employ this in our everyday lives.
It is quite difficult though to categorize people as either risk seeking or risk avoiding. Most us fall into either, or both categories at some stage in our lives. Our risk assessment evolves over time. Things we have done as teenagers we would never even consider in our old age (however that is defined 😇).
You are right, @rpen. We may fall into both categories but one side most times weigh more than the other.
I couldn't agree more. Thanks a lot for visiting. 🙂
well as for me, it depends on the capital and my believe in what i want to invest in, i can easily risk 100 bucks to dive into a trade/business/investment, but when it comes to huge amount like 1000 dollars, then i have to analyze, strategize, planalized and thinkalize before taking any steps lol
I get what you mean. You can afford to lose the 100 bucks and not feel bad about it. Certainly when the stake is high, the decision cannot be impulsive!
We do risk-reward analysis all the time whether we realize it or not. If you decide to go to work you think that the risk of getting there and back is worth the reward of your paycheck.
In general, I am pretty risk averse. I like to follow my gut as much as possible because when I don't that's when I have trouble.
One example is when I was in high school. I NEVER, NOT ONCE cut classes. First of all we went to a private, Catholic high school which was a sacrifice for my parents to send all four of us there.
If you got caught skipping class you had to serve two hours of detention for every hour you missed. It just wasn't worth the risk to me. I didn't want to be in school for the 8 hours I had to be there. I wasn't going to add to it.
Another example is when I was in Las Vegas a few years ago. There was an opportunity to go ziplining. I passed it up without even thinking twice. I didn't care that I was called a chicken. All I could think about is what if I fell and got seriously hurt because of something I didn't need to be doing in the first place. Didn't want to take the chance of being crippled for life.
But that's just me!
!CTP
Hehe, I understand what you mean. I think I'm risk averse too. I like to weigh both sides and if it's not worth taking, I stay back. The rewards must be huge and certain before I dive in! 😄
And after having been burned a couple of times on other things.... I get more careful and wary about whom and what I am willing to trust. Have a great day!😀
You are absolutely right, risk is always part of life whether we like it or not. In investing, we all have different risk-tolerance level.
I totally agree ;)
Came via dreemport by the way :)
I think I am quite risk averse but sometimes I can be adventurous and take risks. It depends on the stakes - I make a judgement call and then I act. Hence I would say it depend on the circumstances.
hi Kemmy, as @ifarmgirl says, we all effectively have different risk appetites. Personally, I am a little more risk averse but I do like to have a balanced portfolio of investments so having a little bit of risk at higher potential yield, sandwiched between more solid investment options (albeit lower yielding) gives me the balance I need. I don't think anyone should dive into any investment without due diligence though. Always do your homework and then decide if you have the appetite for the resultant risk profile of the investment at that time. I found your post in Dreemport this evening. !PIZZA !ALIVE
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