February 26, 2018

Understanding risks, accidents and outcomes

Welcome to the world of understanding “risks” and evaluating outcomes.

When we say a higher speed is risky, what we really mean is that if there is some unexpected external event not under your control (say a broken road, an unexpected swerve from the car in front of you, a dog suddenly crossing in front of our bike, a drunkard crossing the road etc) your ability to maneuver the bike is a lot lower at higher speeds and hence the possibility of an accident and the expected impact from it is also very high.

But the real cause for the accident is actually the unexpected event and not the speed. So while the unexpected occurrence might not happen everyday, if you keep over speeding everyday, then your chances of an accident are very high in the long run.

Even at lower speeds, this unexpected event might lead to an accident. However at lower speeds your ability to maneuver is much better and hence the chance of minimizing the impact of the accident is also very high.

In reality the only way you can predict an accident is to exactly foresee the unexpected event. Now the irony is that it is called an unexpected event precisely for the reason that it is unexpected!

So all we do while driving is to focus on what is under our control – the speed at which we drive our vehicles. We try to manage risk by increasing and decreasing the speeds based on the road conditions.

This is precisely what we should try and do in investing too – control investment risks

Controlling investment risks

Read more at https://eightytwentyinvestor.com/2018/02/25/and-the-award-for-the-worlds-best-risk-manager-goes-to

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