Smart Risk

Uncertainty hides the risks of our decisions. This makes us tread very carefully. But, in reality, most of the decision terrain isn't nearly so dangerous. Things that look risky often aren't, and things that look routine and safe, often are.

The solution is to gain more knowledge and understanding of the specific area. This will clear the fog, often revealing a gentle passage.

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Problem Solving

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  • Risk can be calculated by figuring out the odds.
  • Uncertainties can't be computed. Even if you could do the math, uncertainties don't have any numbers to calculate.

Most people deal with uncertainty by only doing things others have done in the past. But this tends to restrict people by repeating experiences they've had or knowing the experiences of others. This can create a trap where you avoid good opportunities just because nobody has tried them.

Once you understand a system, you can change some risk into uncertainty. Sometimes you can do this completely, but other times you can limit your range of uncertainties to a calculable level.

More knowledge allows you more controlled risk. However, sometimes, people overestimate their knowledge. They may think they understand a system when they really don't.

Risk and Uncertainty

People often confuse risk with uncertainty. But the terms "risk" and "uncertainty" do not refer to the same thing.

  • Risk is precise and quantifiable.
  • Uncertainty is when the underlying system is not understood.

The more you understand a system, the more able you are to convert uncertainty into risk.

The prospect theory shows that people are often willing to make riskier decisions to avoid losses than to make gains - even when the situation is identical but framed differently. For example, a 30% chance of death and a 70% chance of life are two different ways to describe the same thing.

If uncertainty is the default, an irrationally strong influence will be exerted on the outcome.

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RELATED IDEAS

People have a natural tendency to conflate the quality of a decision with the quality of its outcome. They're not the same thing. 

You can make a smart, rational choice but still get poor results. That doesn't mean you should have made a different choice; it simply means that other factors (such as luck) influenced the results.

You cannot control outcomes; you can only control your actions.

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IDEAS

Start With Small Bets

Risk should preferably be viewed as an experiment. This helps with testing innovation and reducing risk if things don't turn out as intended.

Being decisive is simply the most rational way to take on any problem.

Decisiveness means having the ability to decide with speed and clarity.

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