3 Ideas in 2 Minutes on Calculating Risk
Zero-Risk Bias, Fooled By Randomness & the Worst Case
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I. Zero-Risk Bias
Zero-Risk-Bias can have a negative effect on our decision-making as we tend to prefer the complete elimination of risk to 0%. Even though different choices may reduce the greater overall risk.
Imagine you’ve finally decided on buying a new laptop. The decision comes down to two devices. The only thing that’s keeping you from picking one is the tiny risk that you won’t be happy with your purchase after all.
Until you read about one of the seller’s 100% Money Back Guarantee, which speaks to your nagging Zero-Risk Bias…
Source: The Laws of Wealth
II. Fooled By Randomness
To make matters even more complicated, risks are often incalculable. Essayist and former risk analyst Nassim Nicholas Taleb makes a comparison to playing Russian roulette.
Reality is far more vicious than Russian roulette.
First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security.
Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality.
One is capable of unwittingly playing Russian roulette — and calling it by some alternative “low risk” game.
—Nassim Nicholas Taleb, Fooled By Randomness
III. Worst-Case Scenarios
Thinking too much about our chances of success can be quite paralysing. This is why engineer and founder Dave Hitz suggests seeing risk from a different perspective:
A lot of times people look at risk and ask, ‘What are the odds that I will succeed?’ A different way to look at risk is to ask, ‘What’s the worst thing that would happen if I failed?’
—Dave Hitz, How to Castrate a Bull
🐘
Have a great week,
Chris
themindcollection.com
