# Risk Tolerance Assignment

1225 Words5 Pages
1. (A) What is risk tolerance? (B) Why is it an important factor to consider in making smart choices? Risk tolerance expresses your willingness to take risk in your quest for better consequences. It depends primarily on how significant you consider the downside-the poorer consequences of any decision-compared to the up-side. If like most people, you are risk averse, the poorer consequences will weigh more heavily in your mind than the better ones. The more heavily they weigh, the more risk averse you are. Thus, to reflect your risk tolerance in a decision you need to think carefully how desirable you consider the possible consequences relative to one another. 2. (A) After reading Robert Goldman's dilemma regarding his vision, what decision…show more content…
Calculate each consequence’s contribution to the overall desirability of the alternative. Outcomes with a low chance of occurring should have less influence on an alternative’s overall desirability than outcomes with high chance of occurring., To determine a consequence’s contribution to the alternative’s desirability, multiply its associated outcome’s probability by its desirability score assigned in the first step. 3. Calculate each alternative’s overall desirability score. Add the individual consequence contributions to arrive at an overall desirability score for each alternative. The overall desirability scores of its consequences, weighted by the chances of their associated outcomes. 4. Compare the overall desirability scores associated with the alternatives and choose. Compare the overall desirability scores of each alternative, and choose the alternative with the highest score. 3. (C) Why is it beneficial to use desirability scoring when making tough decisions? 4. Identify and explain (in one paragraph per pitfall) each of the six pitfalls to risk tolerance when making decisions. Number each…show more content…
Don’t fudge the probabilities to account for risk. Some people, consciously or unconsciously, account for their risk tolerance by raising the probabilities of outcomes with bad consequences and lowering the probabilities with good ones-just to be safe. Every risk profile is thereby shaded toward a pessimistic view, and the resulting decision is likely to be overly cautious. The lesson learned is to judge chances on their own merits, without regard for your risk tolerance. Account for your risk tolerance separately. 3. Don’t ignore significant uncertainty. Some people make their decision based on the most likely scenario, attempting to eliminate complexity by ignoring uncertainty altogether. Without bothering to make a risk profile, they just assume that the most likely chain of events will occur, determine their best choice under those circumstances, and pursue it. Effective decision making takes all viable possibilities into account. The lesson learned is that when uncertainty is significant, develop a risk profile for each alternative which captures the essence of the