High Risk Opportunity Web Site

 


High Risk Opportunity - Methodology

 

| Chapter 1 from Handbook |

 

Guidelines

 

The following guidelines will serve you well as you strive to find and acquire opportunities:    

1.      An opportunity is a chance of getting extraordinary rewards at ordinary costs and risks. 

2.      Every opportunity has some cost and some risk.   Must be willing to pay the price for opportunity.

3.      Opportunity = Rewards > (greater than) investment and risk

4.      Opportunities abound everywhere, but most people have difficulty seeing them, especially if they are in their own backyard.

5.      Opportunities are most often found in problems.  Big Problems = Big Opportunities.

6.      Opportunities are most often found during period of rapid change.  Big Change = Big Opportunities

7.      Opportunities quickly evaporate  and must be acted upon rapidly.  

8.      Not all opportunities are created equal; Some opportunities are better than others; Challenge is to find the best opportunities.

9.      Most opportunities can be improved with a little innovation.    

10.  Most risks can be reduced with a little prudent effort. 

11.  High opportunity = Risk-adjusted rewards >> (much higher than) investment

12.  High opportunities are rare and must be searched for diligently.  

13.  High opportunities almost always come with high risks, but donít give up in the face of risk because most risks can be managed.

14.  High risks sometimes come with opportunities but be slow to respond as they must be investigated carefully.

 

Definition

 

High risk opportunity is a term meant to describe an extraordinary opportunity that also involves somewhat more risk.  In the decision space described in Figure 2 in the Rewards page, the high risk opportunity region is the upper right quadrant II.  These decisions reflect choices that have clearly higher than normal opportunity to gain high rewards or but also somewhat more than normal risks.  Most good decision alternatives lie along the diagonal line of Figure 2 which define choices whose rewards are proportionate to the risks.  The diagonal line defines the amount of reward that a decision maker should demand given the risks of implementing the investment (time, energy, and resources).  This website calls this diagonal line through the rewards and risks matrix the "neutral line".  Any opportunity (decision choices) on or above this line represents a good, acceptable decision choice.  The amount of reward offered relative to the inherent risks (of execution) is considered favorable, and a rational, risk-neutral decision maker would make the choice under normal circumstances (if they had the resources to implement the decision and the amount of resources required is only a small fraction of their total wealth).  In other words, selecting choices that on or above the neutral line is prudent, because the reward-to-risk ratio is favorable.   A person who is risk adverse may place limits on themselves as to how far out on the risk axis they are willing to go (i.e. how much risk they can safely handle).  However, opportunities (decision choices) that lie far above the neutral line into the blue zone should be given serious consideration, because not to many decision choices are found there.  These high-opportunity, low-risk decision choices are hard to find, but they do exist and often require a trained eye to find them. 

   

While few opportunities (decision choices) lie in the blue zone, there are many decision choices whose reward to risk balance fall below the neutral line into the red zone. Exactly where on the reward and risk matrix the decision choices fall will not be readily known until the decision-maker evaluates the choices to quantify both the risks and the opportunities.  Most people see the opportunities but fail to see the risks.   It is worth the extra time to analyze all decision choices to spot the risks, both the obvious and the latent one.  Only by assessing many decision choices simultaneously using the risk & opportunity scale (see web page) can the decision maker discriminate the better opportunities.   A risk and opportunity measurement scale is one way of filtering out the better opportunities from among any group of choices currently under deliberation.   Attention should be directed to those decision choices that lie above the neutral line and in particular those in quadrants I and II as they represent the high opportunities.    Any choices that offer the reverse, low opportunities and high risks should be avoided at all costs.  But first, you must investigate every seemingly great opportunity to determine what its relative risks and where it plots in the matrix relative to other choices.  Only in comparison do some choices compare better or worse those other choices.

 

Rewards

 

The prospect of gaining rewards - what we think we want and need - is the reason behind all of our behaviors.  All rewards are gained at a cost or an expenditure of resources.   The resources we pay to acquire rewards include the expenditure of time, energy, and financial cost (investment capital).    Most rewards of value to humans are not free (even clean air now has a cost) and requires at least some cost to acquire.    For example, meeting one's economic needs for food, clothing, and shelter are certainly not found in nature ready for consumption but require than people take other natural resources and convert them into useable form.   The act of converting raw resources into finished products ready for consumption to satisfy economic needs has a cost in time, energy, or investment capital for someone.  Those who own consumable goods, in excess of their own needs, can trade or sell them for something they don't have or money that can be stored to exchange for economic goods later.  

 There are fundamental rules that guide the human quest for the satisfaction of needs by trading one's resource for them:


1) More is better than less,

2) Getting what you want sooner is better than later, and

3) There is no such thing as a free lunch.

A sound decision-rule for selecting amongst competing choices for satisfying any need is based on the human inclination to seek opportunities that offer the most gain for the least cost.  Alternately stated, the ultimate golden rule of decision-making is to maximize reward and minimize cost.  Other good decision rules are these:


1) For a fixed reward, spending less cost or investment is better than more.

- A corollary to the first decision rule: more benefit is better than less for the same cost or investment. 
2) Accept alternatives only if the reward is as proportionately high as the cost. 
3) Seek choices that have a high benefit-to-cost ratio is frequently used to screen out the better choices.   

 

The four quadrant matrix in Figure 1 below illustrates those decision rules graphically.    Decision choices are plotted in the graph according to their benefits and their cost to attain those benefits.    Quadrate I contains the ideal or best decision choices, because the benefit is high and the cost is low.  On the other hand, decision choices that plot in Quadrant IV offers the worst decision choices, because the balance between rewards and costs are reversed - the costs are high and the benefits are low - exactly the conditions most rational people want to avoid.  Decision choices that plot in quadrants II and III offer a commensurate balance of benefits to costs.  

Those choices whose projected benefits-to-cost lie above the diagonal arrow (blue and green regions) are better than those that plot below it (yellow and red).   Thus, for decisions with certain outcomes, use the following guidelines in selecting between alternative (each of which partially satisfies a decision-maker's set of needs). 

1) Spend time looking for alternatives that fall into quadrant I and accept as many of them as you can afford.  Decision choices that plot in Quadrant I are most preferred, because they offers both higher benefits and lower costs. 

2) Accept alternatives whose benefit-to-cost ratios fall into the green areas. 
3) Generally avoid the yellow areas unless a need can not be deferred or satisfied any other way.
4) Avoid choices from quadrant IV as there are better choices in both quadrant II and III.  Choices that fall in quadrants II and III offer choices that will either result in higher benefits or lower costs than alternative that plot in quadrant IV.  

 

 

In a world of uncertainty, and most decisions are uncertain to some degree, uncertainty can represent either more cost than expected or opportunities for higher gain than anticipated.   Generally, people dislike uncertainty or risk almost as much as they dislike cost and investment.  Again, an opportunity-to-risk ratio is frequently used to screen out the better choices.   The four quadrant matrix in Figure 2 above illustrates a corollary to the first decision rule: more opportunity is better than less for the same risk.  Stated slightly differently, for a fixed opportunity, less risk is better than more.   Accept alternatives only if the opportunity is as proportionately high as the risk.  Quadrate I contains the ideal or best decision choices, because the opportunity is high and the risk is low.  On the other hand, Quadrant IV offers the worst decision choices, because the balance between opportunity and risks are reversed - the risks are high and the opportunities are low - exactly the conditions most rational people want to avoid.  Choices in quadrants II and III offer a commensurate balance of opportunities to risks.  Those choices above the diagonal arrow (green) are better than those below it (yellow).   Thus, for decisions with certain outcomes, the following decision rules should guide one's decision making quest:
1) Spend time looking for alternatives that fall into quadrant I and accept as many of them as one can afford. Quadrant I is most preferred, because it offers both higher opportunity and lower risk. 
2) Accept alternatives whose benefit-to-cost ratios fall into the green areas. 

3) Generally avoid the yellow areas. 4) Defer or avoid alternatives the plot in quadrant IV as these decision choices are dominated by those in both quadrant II and III.  Both of these quadrants II and III offer choices that will either result in higher opportunity or a lower risk than the alternatives that plot in quadrant IV.  

 

Motivation

 

Mankind is similar to all other living species...they are all needs driven.   Mankind differs from other species in that they have a choice of which needs to pursue and how best to purse them.   Decision-making is the means by which humans decide which needs to pursue and by what means and just a important which needs not to pursue.    There is never a time when a person is without a need.  There are times, however, when the person is unaware of their needs.  There is always a plethora of partially unmet needs continually floating in the background of each person's subconscious mind.    If a person is not consciously directed, then the subconscious mind is in the driver's seat and steering the direction of one's behavior. 

 

Is there really a distinction between wants and needs?  Some people think so.  Wants are often defined as lower priority aspirations and "nice to have" (sometimes unrealistic aspirations) whereas needs are often associated with the "must have" or high priority motivators.  In this website,  no further distinction is made between wants and needs.  Both can motivate and drive behavior.  

 

All human actions, activities, and behaviors (often called the means) are an attempt to satisfy either consciously or unconsciously known wants and needs.   All behaviors are the means by which people attempt to satisfy their wants and needs or what could be called the ends.   The human trait that allows humans to purposefully link the means to the ends is their uniquely endowed conscious.  Like other species, humans are also linked between their means and ends via their unconscious mind.   The subconscious mind is a wonderful tool for satisfying all our lower level needs.  For our higher level needs, we are best served by using our higher powers - the conscious (rational) mind.

 

The purpose of this web site is to aid the conscious mind in the selection of the best means for attaining whatever wants and needs a person - often referred to as the decision-maker - has chosen as their ends.    The higher order ends (wants and needs) are also something that should be deliberately chosen.   This website does not attempt to influence the choices of ends, as they are very personal and relate each person between his/herself and their creator.  

 

All one really needs to know about the motivating power of needs is that the highest unmet (wants) needs tends to dominate as the motivation for current behaviors.  A sample list of motivators (needs) is shown in the table before.   The hierarchy of needs is based on motivation models of Robert Ardrey and A. H. Maslow.

 

 

Most people find themselves attempting to fulfill higher-level needs like self-esteem and self-actualization although surrogate, far removed ends.    For example, people seek fame, wealth, and achievement, because they believe that doing so will give them what they really want - to feel good about themselves.   Rather then getting too far into the psychology of need, the main point will be restated:  Like all animals, men and women are likewise needs seeking.  Decision-making skills are useful in selecting both the needs to pursue and then in deciding on the most effective, efficient means to satisfy them.   Decision-making  is the focus of this website. 

 

Opportunity = What is Possible?

 

We often wonder what we are capable of achieving if we applied our best efforts. What helps us to find the limits of our capabilities is to try, and then, we will know for certain. Most people want to know in advance of trying if they will succeed, because it they know they can't do something, then they will not waste their time trying. But life is uncooperative in this regard. Outcomes are veiled until the very end. We cannot know the outcome before the facts are revealed. Very few things in life are certain, except perhaps the laws of physical. The sun will rise tomorrow unless something very strange is happening. All else is largely unpredictable.

In life, we don't know what we are capable of achieving most of the time. The limitations of time, energy, and resources prevent us from trying everything to find out. In order to decide how we will allocate these scarce resources, we attempt to envision our chances of success at anything we might try. Much in life is uncertain. In fact, in the presence of uncertainty, where practically nothing is certain, all one can conclude is that nothing can be ruled out. However, this uncertainty gives us an advantage that most people fail to appreciate. When nothing is certain, and most of life is uncertain, then all possible outcomes are possible, because we have no way of ruling out any outcomes.

 

When nothing is certain, then everything is possible.

 

The next time I consider giving up before I even try, I will remember that neither success nor failure are certain. Both are possible. I will only find out what is possible when I make my best effort. Sometimes, intention has its own way of influencing reality for the positive.

There are two ways to view the word opportunity.  One view of opportunity is the insight or discovery of a chance to exchange something you own, such as time energy, and capital for something else of value.    A job is an opportunity, because it represents a formal agreement to exchange your labor for a paycheck.

 

A second view of opportunity is the upward potential gaining more or extra rewards than expected from a decision.  Opportunities exist whenever an alternative or its implementation has an uncertain outcome, and the uncertainty has an upside potential.   For example, an oil exploration company drills a hole to find new oil deposits.  On the downside of the uncertainty, there is a risk that the hole is dry.  On the upside of the uncertainty, there is an opportunity that the drilling hits a gusher.   Decision-makers normally enter into a decision with some expectations of what the results will be after the decision is implemented.  When the decision-maker does not have perfect control over the outcome, the results achieved may vary widely from the expected.

 

If a decision-maker were to engage in a large number of uncertain endeavors, they should expect to receive some outcomes that exceed expectations and some below.     Over a long period, the average result will approximate the norm or the overall expected result.   However, by taking risk and opportunity into account during decision making and then applying risk management and opportunity seeking strategies during implementation,  the decision-maker's average result should exceed the norm. This is the purpose of this website to support the decision-maker so that he/she receives higher outcomes from their decisions and subsequent implementations. 

 

"Opportunity favors the prepared mind"

 

 Opportunities represent a chance to earn rewards above the norm.  To discover any opportunity, one must be alert and search for them.  Once discovered, an opportunity needs to be shaped so as to maximize its potential.    The simple interpretation of the above quote - "Opportunity favors the prepared mind" - is that opportunity exists only in the mind of the beholder.   A conditioned mind sees opportunity.  To take this notion a step further, different people with differently prepared minds will view the save situation differently.   Each is likely to perceive a different opportunity.   The meaning to each of us is 1) every situation has an opportunity (remember the "lemonade out of lemons" parable), 2) one must look for the opportunity in order to find it, and 3) a conditioned or prepared mind is likely to find what it is looking for.

 

Leverage

 

"Goals Limit Options." - Sure, goals are a good thing...we all need to have some if we want to focus on getting what we want and need.  We just have to be careful that we don't let our goals from the past blind us to current opportunities.  The problem with goals is that they limit us to what we already know we want.  If we fail to stop and look around at what new opportunities are possible, then we are stuck with what we desired in the past.  We missing seeing other good trees in the forest because we have become so focused on just a few of them.   In fact, we are living in a forest of trees, and some are taller and thicker than others.   To limit ourselves to selected goals, this means we have limited ourselves to only what these goals can provide, and ignored all the potential benefits inherent is all other possible goals.   Things change, and we change.   So, our goals should change as well.

 

Changes in our goals should not be taken lightly.  People hesitate to abandon well-worn goals.  People hate to cut their losses.   The concept of abandonment, after having put considerable time and effort into a goal, is disheartening.   However, cutting one's losses is called "sunk costs" meaning you can't recover what you've already invested but you can shift the resources to something better if the potential benefit is worth what you will lose from not continuing to purse an old goal.

 

In summary, you need to continually scan the horizon in search of new and better opportunities, and to abandon those that are less attractive than the new opportunities that are continuously emerging.  

 

As long as I have to work, I might as well get the work done as quickly and easily as possible. I need to find ways to convert a small amount of effort into a prodigious amount of work accomplished. The last thing I want is to spend a huge amount of effort to accomplish a piddling amount of work. What I need is a way to leverage my efforts to get more done in less time with better quality. In other words, if I have to do something I want to do it faster, better, and cheaper.

 

Here are some tips for gaining leverage in whatever you do. First, use the best tools, equipment, capital, and technology available by buying, renting, or borrowing what you need. Second, get the know-how to do the job right, if you don't have it, then get the training or hire someone who does have the experience you need. The tools are useless if you don't use them properly with the best practices. Third, team up with others to get the job done. A cooperative effort between people who need to do the same types of work allows each to capitalize on the strengths of each other. Plus, many hands make light work. Fourth, focus all your attention on the job until it is done. Don't allow yourself to get distracted. The setup time and rate of forgetting is high on some jobs. Fifth, supply personal leadership on your own project by planning, coordinating, and supervising yourself and your crew. Sixth, ensure the team has proper motivation to get the job done as soon as possible by providing compelling reasons for an early start and quick finish.

 

When you plan your next project, make sure you take advantage of all possible sources of leverage so that a little amount of effort products the results you seek in record time.

 

Risk and Return

 

On average, we get what we pay for.  All human activity starts when a need is discovered.   Needs are often classified as physiological, safety, social/recognition, status, and self realization.   When we identify a need, we strive to fill it.  As humans, we have many wants and needs and the universe provides many paths to fulfill some or most of them.  All it takes to satisfy our needs is to find choices/alternatives whose potential outcome will supply those needs.  But our choices are not without a cost.  To satisfy our needs, we must be prepared to exchange something of value that we own for something else we need.    For example, our time, energy, knowledge, know-how, and skills are all resources that we own and could trade with others for something we value more.    There are many ways to satisfy any specific need.   What each person with a need must decide is how best to trade resources they have in excess (time, energy, resources, etc.) for something that will fill a deficiency (food, clothing, shelter, etc.).  We are all in search of the best deals, bargains, and return on our investment.  We makes hundreds of decisions each day in pursuit of our needs.  We are constantly choosing what behaviors will lead to the satisfaction of their dominate needs.     

 

Decisions are directed to fulfilling needs.   One could categorize decisions by the type of need it fulfills such as survival & subsistence (food, clothing, and shelter); predictability and control (steady cash flows); acceptance, friends and family; social status, recognition, achievement, and identity; and finally, the spiritual realm of growth, purpose, enlightenment, and self realization.  Each need presupposed a set of possibilities that would, if enacted, satisfy the need.  Decision-making is the means of matching alternative behaviors to needs.    

 

Most decisions are based on satisfying multiple needs.  A single behavior could satisfy many different needs.   A good meal satisfies hunger needs and, in the company of others,  may also satisfy social, status, entertainment, and relaxation needs. When a particular means satisfies one need, it generally satisfies others.   A good goal to strive for in decision-making is to find alternatives that satisfy multiple needs.  So, when balancing the pros and cons of any decision, multiple needs/goals are often the focus. 

 

Some needs are not quantifiable.    Most human needs that are measurable are intermediary which is to say they are the means to higher order end.  For example, many of our major decisions involve money, career, investments, real estate, etc.  Money provides current and future security and the means to acquire other physical things that can satisfy the other needs.   Dollars and other quantifiable intermediary needs are easy to measure, and each is a gage of a future ability to satisfy needs.   However, many or even most of our terminal needs are difficult if not impossible to measure.  How would one go about measuring the relative satisfaction of these needs: self-esteem, standard of living, peace of mind, beauty, love, reputation, etc.  Nevertheless, in decision making, one must be able to discern how well each alternative will be able to satisfy all the unmet needs that are relevant to the decision.    

 

Time and energy is the most precious asset that each of us owns.  Time and energy is what we have the largest excess supply of and are most prepared to offer in trade for what we want and don't have.   In other words, we are willing to work for what we want.  Sometimes what we are willing to trade is money in hopes of earning even more money.  Some people call this investing in the future.  If the terms of the trade include the dimension of uncertainty, then the investment has a element of risk as the return on the investment may vary widely from the expected outcome.

 

Reward should exceed investment.  The proper compensation for any investment (in time, energy, or money) should be in direct proportion to both the size of the investment and the amount of uncertainty.  In other words, the higher the investment and the higher the risk, the greater should be the expected return. The relationships between expected rewards and investment and risk are shown in Figures 1 and 2 in the rewards web page (click to go there).   These figures illustrate that the decision maker should be looking for alternatives that lie in the blue and green areas.  Any alternative with terms that would place them in a yellow or red zone - where the opportunities are not commensurate with the investment or risks - should be rejected and ignored.   The poor choices or alternative should be screened out at the front end of the decision-making process.   Reject all choices that don't offer commensurate returns proportionate to risk and uncertainty.   Those choices that do offer the commensurate returns then undergo a second-step in the analysis.

 

Take precautions to reduce risks during the execution of your decision.   Complex decisions that take time to implement are subject to risk (as well as opportunities).   There are steps you can take to reduce the risk that your outcome will be less than what you are expecting (or find opportunities to gain higher rewards than anticipated).  The proactive steps you take to prevent bad things from happening is called risk management and this topic is presented in the risk website (click to go there).

 

 Risk and Opportunity

 

The figure below is intended to illustrate how an array of prospective decision choices can be assessed (rated and scored) as to their relative risk and opportunity potential.  Scales are provided for sorting the choices based the prospects of risk and opportunity as measured in comparison to each other.   Each of these scales represents one of the two axes on the matrix shown below (opportunity on the vertical and risk on the horizontal).  The better choices plot in the region above the neutral (diagonal) line where opportunity scores are higher and the risk scores are lower.  The poorer choices plot in the region below the neutral (diagonal) line where the opportunity scores are lower and the risk scores are higher.  The rational decision maker is one who seeks opportunity and avoids risk.   The very best choices have characteristics that plot in the blue region and the very worst choices are found in the red region.  The yellow region is neutral in that a decision-maker is relatively indifferent to these decision choices.

 

In summary, given a set of decision choices under evaluation by any decision-maker, those that plot above the neutral line are give favorable consideration and the choices that plot below the neutral line are eliminated.  Those decision choices whose risk and opportunity characteristics plot on the diagonal, neutral line are held for future consideration but only if new ways are found to either improve the opportunity or reduce the risk.

 

The following features of the two constructed scales in the matrix below should be noted.  First, the constructed scales are relative to the set of choices under consideration.    A single decision choice would be difficult to rate just by itself in isolation.  The decision maker is advised to either evaluate decision choices in groups or to select some past decisions and use them as reference points.    Then, new decision choices are simply rated relative to previous, familiar decisions in terms for their potential for upward opportunity and downward risk.  

  

On each of the opportunity and risk evaluation scales below, there are no absolute physical examples associated with any of the 5 incremental scalar intervals.   A relative scale means that the set of choices may reflect an inherent, perceived difference only between the choices currently available.   For example, decision choice numbers 7 and 11 are rated at opposite sides of the opportunity scale.   What this means is that set of rewards associated with each are spread far apart in the mind of the decision maker.   Second, the scale is relative only to the person or organization that is making the decision.  What one person considers a high risk level may be completely different from another person, based on individual differences in perception, preference, and ability to deal with uncertainty..  One person may consider decision choice #4 "Face Lift to Enhance Personal Appearance" as very low risk and another person might considerate it to be high risk for entirely different and unique reasons.   These judgments are personal.  

 

What the matrix below suggest is that of the set of twelve decision choices under consideration, only choices #1, 2, 6, 7, and 8 should be given strong consideration for selection, so long as they are not mutually exclusive.  A mutually exclusive choice means that if you pick one, it precludes you from picking another.  For example, if you are planning a vacation, you can't go to both a third world country and a local resort at the same time (decision choices 5 and 6).  Choices in the blue (#2 and 7) should be given the highest priority for implementation.  Choice in the light blue (#1 and 8) should be given second priority, followed by the green (#6).   Decision choices 9, 10, and 12 should be dropped from further consideration as they are deep in the undesirable region (high risk and low opportunity).  Finally, since choices 5 and 6 are mutually exclusive (vacations) and choice 5 is dominated by choice 6 (the same opportunity but less risk), it too should be dropped from current consideration. Decision Choices 3, 4, and 11 could be retained for future consideration in case the decision-maker can find new information or innovative thinking improves them.

The next time you have a decision to make, see if you can find other related or completely different decision choices to you have been considering.   Then, evaluate them as a set to find those that are worthy of continued consideration and which ones to drop. Depending on the color of the matrix their risk and opportunity characteristics plot, you are given insight as to how value they are to you.

 

Regret

 

Regret is an extremely strong motivator to a decision-maker.  Regret is a decision-making factor that all decision-makers want to avoid.  Regret occurs when the outcome of a decision does not deliver the desired results.   The greater the potential for loss (or shortfall in expected result), the greater the regret.  Regret can occur under two different circumstances: when 1) there is a chance for gain but the option was not pursued and 2) there is a chance of loss and the option was taken.  These two circumstances are shown in Figures 4 and 5 and discussed below.  

 

In most circumstances, the decision maker is motivated by seeking the prospect or chance of gain as shown in Figure 4.  The decision-maker either chooses to accept or reject the decision choice.  There are two ways the outcome brings satisfaction to the decision-maker.  One, the decision-maker is satisfied with the decision if they accepted the choice and the outcome was good (Quadrant I - the outcome justified the investment).  Two, the decision maker is satisfied with the decision if they didn't accept the choice, and the outcome turned out badly (Quadrant IV - outcome did not justified the investment).  On the other hand, there are two ways the same decision can result in regret for the decision-maker.   One, the decision-maker regrets the decision if they accepted the choice, and the outcome turns out badly (Quadrant II - the outcome did not justify the investment).  Two, the decision-maker regrets the decision if they reject the choice, and the outcome turns out good (Quadrant III - loss of opportunity of gain).

 

In some circumstances, the decision maker is motivated not by seeking gain but by avoiding the prospects or chance of perils or losses as shown in Figure 5.  The decision-maker either chooses to accept or reject the decision choice of taking protective measures (which have a cost such as insurance).  There is an inherent reluctance for spending additional resources just to maintain the status quo or to keep things operating as they have been.   The expenditure of resources to avoid risks has a certain cost but the effectiveness of the risk avoidance is conditional on uncertain future.   The perils of highway accidents, home fires, illness, debilitation, early death, etc are some clear examples of this type of perils that most people protect themselves against with insurance.  The thing we fear may or may not happen, but the cost of insurance is certain.   If we don't protect ourselves and risk occurs, the financial consequences could be expensive.  In many decision, the downside risks are not so catastrophic so there is an incentive for the decision-maker to take a chance and not to accept the extra cost of protection.   

To protect against the chance of loss, the decision maker is not motivated by gain, but instead, the motivation is to avoid a peril or loss.  There is an identified risk wherein pre-emptive action can be taken to reduce or avoid its most serious consequences.  There is a probability that the peril will not happen.  The issue is whether or not the decision-maker wants to take a chance or to take risk avoidance actions.  A good example is the weather.  It might rain, and you have three blocks to get to the office.  You have two choices:  to take or not to take an umbrella.    The two possible outcomes are rain or no rain (there are actually more possible outcomes such as light rain, heavy rain, torrential rain, etc.).  In this circumstance, there is no prospect of gain, but there is a prospect of loss.  There are two ways the outcome brings satisfaction to the decision maker.  One, the decision-maker is satisfied with the decision if they accept the choice to take preventative measures (bring the umbrella), and the outcome turns out badly (it rains).  The decision-maker avoids the peril (getting wet, cold, and feeling miserable while at work as in Quadrant III).  Second, the decision-maker is satisfied with the decision, it they rejects the preventative measure (carrying the umbrella) and the outcome is good (no rain).  The decision-maker took a gamble, and this time it paid off as in Quadrant II (they didn't have to carry the umbrella to and from work).    

 

As seen in Figures 4 and 5, there are two actions that the decision-maker can make that could lead to regret: commission (accept the choice and make the investment) and omission (reject the choice and do nothing).  Whether the action leads to satisfaction or regret depends on the circumstance.  Consider the case where the decision-maker is seeking a gain.  If they accept the investment, and the investment performs poorly (Quadrant III), then the regret is one of commission (they took an action but shouldn't have).  If they reject the investment, and the investment turns out good (Quadrant II), then the regret is one of omission (they should have taken some action but didn't).   The situation is exactly reversed in Figure 5 where the decision-maker's motive is avoiding loss (risk or peril).   Notice that the quadrants of regret are flipped (or the reverse of each other).  In Figure 4, the motive is gain, and in Figure 5, the motive is avoidance of peril.  

 

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