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How to manage uncertainties with risk profiling

This article is a continuation of my series on decision making in uncertainty and the age of the Corona virus. In my previous article, I explored the adaptive decision-making approach. This article is about risk profiling, another approach to managing uncertainties.

Managing uncertainties with risk profiling

You start by naming the key uncertainties, the outcomes, and consequences. If you have enough data, you can then turn uncertainties into probabilities by assigning chances of outcomes and consequences. (In future articles, I will be discussing the Payoff Table and Consequence Table).

The better consequences of an outcome relative to the more inferior effects, the more it will be acceptable to take the risk.

The higher the chance of outcomes with better consequences and the lower the likelihood of outcomes with more inferior effects, the more likely for you to take the risk.

For example, a friend asks you to invest with him, promising you that the chance of gaining or losing is 50/50. He will secure your money if you lose, so you will only lose 10% of your money, and if the business succeeds, you will gain 40% within a year on your investment. It’s a no brainer that this is a very acceptable risk profile. If he is not securing my loss, I might lose all my money, and this is a very high-risk profile.

Knowing the risk profile of your investment will help you answer your friends, call “Are you in with me, or are you out?”

If you don’t have any information about the decision you are making, the decision you make will depend on your attitude and approach toward life.

Your attitude affects your decisions

Having an optimistic view, will assume the best outcome; being pessimistic, you’ll believe the worse result.

Remember the tsunami that happened in Bali in 2004. Still, every year, millions of people travel to the island and come back to their homes safely. The risk of another tsunami is low. An optimistic attitude means you are more likely to go there than if you had a pessimistic view.

Gathering information is crucial in tough and uncertain times; take your time while making big life decisions.

Parts of this article were published in my book, In or Out: A Practical Guide to decision making.

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