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How To Make Good Decisions
- Read in 16 minutes
- Audio & text available
- Contains 10 key ideas
Risk Savvy is an exploration into the way we misunderstand risk and uncertainty, often at great expense to our health, finances and relationships. However, if we better understand risk, we can develop the tools necessary to navigate this highly complex world without having to become an “expert in everything.”
Key idea 1 of 10
Risk and uncertainty are fundamentally different.
What image comes to mind when you think about risk? Chances are good it’s a high-stakes poker game in Vegas. Risk, however, is actually far more subtle.
In essence, a risk is any situation in which you have many alternative outcomes, and are aware of them and the probability that they’ll occur.
People often mistakenly think that situations are risky even when they’re uncertain of the consequences. However, risk actually involves a great deal of certainty: you’re not only aware of the possible outcomes but also of the probability of each outcome.
When you play a slot machine, there are only so many possible combinations the machine can generate. A quick look at the design of the machine can give you valuable information on the frequency with which each combination is generated, and therefore how probable each combination is.
Knowing this, you can play slots confident that you’re at least aware of the dangers, since you can prepare for each possible outcome.
Sometimes, however, a situation has only one outcome. In this case, you don’t face risk but certainty. For example, when you place your hand on a hot stove, you know for certain that you’ll burn your hand.
This contrasts directly with uncertainty, i.e., not knowing the probabilities of all possible outcomes, or even not knowing what all the possible outcomes are.
For many, this sounds much like their definition of “risk.” For example, if you’re at a poker table in Vegas, you probably don’t know whether the player across the table has a pair of twos or a full house.
However, the variables in poker are knowable: since there are only so many cards in a deck, only so many possible combinations of cards are possible.
As a counterpoint, weather is often uncertain: tomorrow could be rainy, sunny, cloudy or even snowy – it depends on many factors, not all of which can be known.