This is straight from Keith Cunningham’s book The Road Less Stupid.
I’ve read versions of this, but never this succinctly.
He says there are 3 steps to to making decisions that involve risk.
The first two steps are obvious:
1) Measure the upside2) Measure the downside
But the secret sauce is in the 3rd step:
3) Determine if you can live with the downside
*mind blown*
Let’s play that out.
All of that company stock you own.
1) Upside: It keeps going up, up & away2) Downside: “Enron” happens. Stock goes to $0.3) Live with
downside? That depends how much of your money is in the stock.
10%? No problem. Hold on to the stock.
75%? Uh oh. Better diversify.___________________________________________
Don’t get Long-Term Disability Insurance:
1) Upside: Save money on premiums2) Downside: Financial catastrophe 3) Live with downside? Definitely
not.___________________________________________
Or the other way around:
Get Long-Term Disability Insurance
1) Upside: Avoid financial catastrophe2) Downside: Spend money on premiums and get nothing in
return.3) Live with downside?: Sucks to waste money, but I’ll
live. ___________________________________________
One more….
Buckle your seatbelt
1) Upside: Won’t fly through your windshield2) Downside: It’s uncomfortable3) Live with downside?:
Sure, I’ll deal.
Am I a dork if I think it actually makes decision-making kind of fun?
