Smarter Investing 3rd edn, 3rd Edition

6

Smarter risk insight

‘Risk surrounds and envelops us. Without understanding it, we risk everything and without capitalising on it, we gain nothing.’

Breakwell and Barnett (2007)

6.1 Making sensible risk decisions

Before we get ahead of ourselves, it probably makes sense to stop and think about what risk actually is. At its very basic level risk can be defined as: the probability of an adverse event (hazard) happening and the effect of this exposure due to a specific hazard on you. The words in italics are critical, particularly as each is often open to interpretation or estimation. In short, risk is the product of the probability of a hazard occurring and the impact it will have.

Everyday we are faced with ‘risk’ choices, from crossing ...