How to Make Bounded Decisions on Risk (Part II)

11/01/2011

Ask yourself what is the upside?

As the latin root of the word risk indicates an integral part of risk taking is the benefit we achieve. However often times decision makers do not have a clear understanding of what is the upside or payoff. This is a reflection of the bounded nature of most decision making in the real world where we are almost always limited in the time and information available to make decisions. 

So a common sense heuristic to apply is if the downside can be quantified then so to should the upside along with any uncertainties. If the benefit is nebulous or uncertain then the less inclined we should be to take the risk.