Risk-Benefit Analysis

When making decisions, I’m constantly weighing possible risks, costs, and benefits. For example, driving to the grocery store on a normal day involves the minimal risk of getting into a car accident or some other unpredictable catastrophe. Then there is the cost of time, gas for the car, and the possibility that I will spend more money on unnecessary purchases while at the store. The benefits are that I would have the necessary ingredients to prepare meals for the next week. In this case, benefits are worth the risk and cost, so I would go ahead and drive to the store. Now, if the same choice had to be made on a winter night, under icy road conditions—the risk might outweigh the possible benefits. Or, if instead of groceries, I was in need of medicines for my very sick child—then it might be worth taking whatever risk necessary to drive to a pharmacy.

There is a certain amount of risk-benefit analyses going on in the back of our minds all the time. However, some people are more risk tolerant than others—taking risks with their health, finances, safety, and relationships. They are willing to play the odds that things will work out in their favor.

For example, in the U.S., over $50 billion is spent each year on lottery tickets. The odds of winning are 1 in 14 million. There is a greater chance of being struck by falling airplane parts. Slot machine odds can be just as bad—up to1 in about 34 million chances of winning the top prize. People do win and sometimes they win substantial amounts, but it does mean that the more you play, the more the math works against you, and the better the chances are of you walking out of the casino with less money in your wallet than when you came in. (from investopedia.com)

Warren Buffett has called gambling in general a “tax on stupidity.” Buffett’s ability to quickly and effectively analyze risk/benefit ratios has made him one of the richest men in the world. Most of us will never get to his level of talent in this matter. Yet, if we could develop enough skill to keep our families safe—not exposing them to unnecessary harm—then we would be rich in peace and contentment.