Risk & Return

| Risk & Return | Risk & Opportunity Scale | Regret |

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).

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