Risk Management: The Art of Long-Term Survival
Risk Management
Imagine a hero standing at a crossroads with three paths.
If he takes the road to the right, he will face a serious challenge with a difficulty level of 100. At the end of this path, however, he will be rewarded with five gold bars.
The middle road leads to ten gold bars, but the hero will encounter not one, but three challenges along the way. Each of them is no less difficult than the one on the right-hand road. Taken together, their total difficulty amounts to 300.
The left road involves a less demanding challenge with a difficulty of 60, but the reward is modest only one gold bar.
Which path would you choose if you were in the heros place?
Now suppose the hero chose a balanced level of risk, but along the way he was bitten by a snake and never even reached the challenge.
This is exactly what risk-taking in financial markets looks like.
In the real world, risk is first and foremost the probability of loss.
Risk is an inevitable consequence of the fact that the future is unknown. At any given moment, there are far more possible outcomes than those that ultimately materialize. It is precisely this gap between the range of potential outcomes and the single realized result that gives rise to risk. The future cannot be viewed as a predetermined or predictable script; it is a spectrum of possibilities that includes both favorable and unfavorable outcomes.
An investor may estimate the range of the most likely scenarios and base their expectations of the future on them. However, even the most probable event offers no guarantee that it will actually occur.
Risk comes in many forms, and the probability of loss is only one of them. Another important type is the risk of missed opportunities the risk of taking too little risk. Stayin