Sketchplanations

Explaining one thing a week in a sketch

Core components of risk - Sketchplanations

Core components of risk

Your preference for risk - a psychological measure that changes slowly throughout our lifetime except for sudden shifts with big life events (eg losing a family member, having a baby).

Your capacity for loss - a situational factor that depends on your circumstances and, say, the context of the money you are taking a risk with. For example, if money is an unexpected bonus or gift, then you probably have a greater capacity for its loss, than if you earned it.

Both aspects are important. For example, some people are naturally daredevils on the ski-slopes, but even they may slow down a little when they have a family depending on them.

Keep exploring

Prospect theory - Sketchplanations
Sneaky cognitive biases: hindsight bias, loss aversion, recency bias - Sketchplanations
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