Decision by asymmetry
Pro and con lists are great to evaluate important choices. Comparing the significance of potential downsides and upsides can be even more helpful.
Car insurance is a good example. You trade a known downside of $100 or $200 per month for reasonable certainty that you will be made whole even if your car is totaled. For most of us, the monthly premium is well worth the peace of mind. Even if not required, we choose a small downside to avoid a big one.
Lottery tickets are another example. You pay $1 and most likely win nothing, a small downside. The jackpot is often so large as to be unimaginable, a huge upside. It sounds pretty good, so even people who don’t normally throw their money away might do it for a big jackpot. No matter the jackpot size, you’re probably going to lose. It can be fun to dream of winning, but it’s a terrible investment strategy.
Most decisions are between these extremes. If you’re unsure of what to do, look for the scenario that offers a probable upside that is greater than the potential downside. Considering probability protects you from outlandish risks like investing most of your money in lottery tickets. Investing in stock market index funds is much more likely to pay off.
Do you make big decisions based on potential upside, avoiding downside or something else?
Hopefully, my questions cause you to reflect on your own thinking, relationships or choices. Maybe I even inspire you to make positive changes.
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