Life: A Game of Probabilities and Risk Management
Every day, we make countless decisions. From the moment we wake up to the time we go to bed, we're constantly making choices. But have you ever stopped to consider that each of these decisions is, in essence, a bet? A wager against the universe, based on our assessment of the probabilities of success and failure.
Consider something as simple as driving a car. We decide to drive based on the probability that we'll reach our destination safely. But what happens when we fail to consider the probability of failure, or the magnitude of that failure?
Each action we take has to consider three factors: the desired outcome, the probability of that outcome, and the magnitude of a failure of that outcome to materialize. Some people refuse to consider failure and take unnecessary risks. This is much like driving a car without considering the potential for an accident.
The criminal mindset, for instance, thinks in terms of reward versus risk. If the penalty is low, then the downside is reduced. But this is a dangerous way of thinking, as it fails to take into account the potential for catastrophic failure – especially considering the far-reaching direct and indirect consequences of the criminal activity.
For those of us who are parents, teaching this skill is important particularly when it involves peer pressure, which can obfuscate the risk and the reward equation. Questions arise – “Should I get into that car, when I know the driver has been drinking? If I don’t, will people laugh at me or consider me unreasonable?”, “If I decide on this major, will I sacrifice all opportunities in other areas?” One needs to be very clear about what they stand to win or lose (in the example of the first question). In the case of the second question, as a trader, I would consider this similar to position management. What this entails is understanding that you made a choice, however that choice can be actively managed to increase your odds of success. For example, many kids are focusing on STEM, however the ones who pursue creative outlets can create advantages of their own by adapting to changing environments and applying their skillsets to new mediums. For others, school might not even be a preference, nor an option. Nonetheless, this is often a circumstance that is managed to favorable outcomes as well. The point is that some choices can have very important consequences (particularly to the downside), and one must be mindful of these circumstances. But in other areas, just taking action may be all that is needed, followed by a series of smaller decisions to manage the “position” and increase the odds in your favor.
So the next time you're faced with a decision, big or small, take a moment to consider the probabilities. And also understand that decisions can be further managed to actively increase your odds of success. You might just find that it changes the way you see the world. We’ll continue this discussion in future posts.
Remember, the goal is not to eliminate risk but to understand it, manage it, and make it work for you.