What is risk? Going to the casino with a couple hundred dollars and playing blackjack? Quitting your job and following your dreams? Driving intoxicated? According to the Merriam Webster Dictionary, risk is defined as “possibility of loss or injury”. That’s a weak answer and won’t be accepted, lets dig deeper.
There’s only one type of risk in my dictionary; calculated risk. Risk isn’t playing the lottery with your final dollars in your pocket, nor is driving intoxicated. The probabilities of losing the initial deposit when playing the lottery are much greater than making one penny. The chances of an accident occurring while driving under the influence are greater than a non accident. Those examples don’t fall under the category of calculated risk, it’s gambling. When a bet is taken with knowing the odds are under 50% its considered a gamble.
Calculated risk is defined as; knowing the odds are in your favor or greater than 50% and taking advantage of an opportunity. Sometimes the “betting line” isn’t so black and white. For example, two interested buyers are interested in buying a real estate property for an investment. A builder would be able to calculate the risk by considering the location, price, schools nearby, and recent comps. Whereas somebody with no experience would be taking on considerably more risk by not knowing the market or having the expertise.
To better calculate risk involved in any situation, the person(s) must acknowledge what they’re risking in return for the reward. Any bet that pays you more than what you’re risking has a probability of success under 50%. While any bet that pays you less than what you’re risking has a probability greater than 50%. The more you risk the greater the odds are in your favor, the less you risk the less the odds are in your favor. Think about it, if a bet pays $100 for every $300 at stake, the odds are to the betters advantage, giving him a probability of success of approximately 75%. Nobody would ever offer a bet with a $300 payout for every $100 at stake unless, your odds are less than 25%.
Financial Markets are the only place in the world that allow people to sell the bet instead of buy it. If the odds don’t favor the buyer, then sell it. A lot of people buy scratch tickets, but have they ever thought of selling them (theoretically)? Since the jackpot can be more than 1000x the cost to buy the ticket, the seller must have the odds in his favor. That’s the world of option trading. Some people look to buy the cheap ticket in hopes to win the jackpot or unlimited profit potential. While others sell these “tickets” for a high probability of success with lower potential profit. Anytime you limit or cap your maximum profits you’re increasing your statistical chances of success. There’s no such thing as buying a cheap bet with a high probability of success and unlimited profits, or winning the jackpot. In that case, the seller wins almost every time, and will win consistently overtime.
Risk is a misused term that has been taken out of context. People associate risk with gambling or doing something dangerous. When in reality risk should be to your advantage. Nobody should ever take on a bet that doesn’t favor them. You’ll have to risk something in order to take on the bet, but make sure the odds are in your favor. And if you ever get a chance to sell a scratch ticket, you should probably do it..
By: Spencer Enos
