Risk vs. Reward: Why We’re More Blind to the Former?

Risk vs. Reward: Why We’re More Blind to the Former?

Some personal observations and a set of recommendations

It’s natural for one to take big risks believing that it would lead to big rewards.

If you aim to win big, it’s fair that the risk you should take is proportionally big as well. It’s fine! Though I want to talk about a couple of problems with this way of thinking.

When the “big risks” and the “big rewards” are together in a statement, our brain focuses more on how “big” the reward is and avoids the second “big” next to the risks.

While making an investment, starting a business, making consequential choices, and even giving small daily decisions, if the upside is highly appealing, we’re in danger of being blind to what’s at stake.

A study suggests that rewards gleam more brightly when we’re under stress (Mather & Lighthall, 2012).

It’s rational to risk 5 dollars to win 100 dollars if the probability of success is more than 50%. Yet even in gambling where the odds are systematically against our favor, people think it is worth the shot.

If we have a sneak peek at the gambling stats in the U.S:

  • About 85% of adults in the U.S. have gambled at least once in their life.
  • The gambling industry takes in about $500 billion a year.As many as 23 million Americans go into debt because of gambling.
  • The average loss of those 23 million people is estimated to be around $55,000(Debt.org).

The promise of astronomic returns shines so hard that it makes one blind.

There are many scientific explanations for this preference, yet as I am not a behavioral psychologist, I’ll just share some observations and mostly look at it from an investor’s perspective.

This article is originally published on Medium.

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Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. Use this information at your own risk.

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