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Think Smarter: Critical Thinking to Improve Problem-Solving and Decision-Making Skills by Michael Kallet

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33 Risk

What's the Risk?

Because the risk criterion is always present, it deserves its own chapter. Risk is reflected in pro-versus-con or upside-versus-downside conversations. As you likely know, a con or downside is the negative result of a decision—something that prompts us to ask, “What's something bad or unexpected that could occur?” Everyone views risk differently. The probabilities of certain outcomes are the same, but people interpret and apply them uniquely. As a result, a decision might be yea for some and nay for others.

Let's say your net worth was $100,000. You're in Las Vegas for a vacation, and you decide to play at the roulette table. Would you place a bet of $10,000, with the risk of losing it all at once? Probably not: that's 10 percent of your entire assets. If you lost it, you would negatively impact your livelihood in a significant way. Would you place a $1 bet? Sure, because it's only one-thousandth of 1 percent of your assets. If you lost $1, it wouldn't affect you at all. You're next to another player whose net worth is $1 billion. For the billionaire, that same $10,000 bet would be one-thousandth of 1 percent of his assets, as $1 is to your $100,000. Although most billionaires are smart enough not to waste $10,000, there would be virtually no impact on them if they did. Although the statistical probability of losing $10,000 is the same for you as it is for the billionaire, the total risk of losing the $10,000 is very different between the two of you. The ...

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