Asymmetric Risk/Reward is one of those very cool concepts usually discussed with regard to money, or investing.
(It’s somewhat similar to expected-value decision making, which I cover here, but I think this concept deserves its own post.)
Asymmetric Risk/Reward refers to any situation where the potential benefit is much greater than the potential loss.
It’s anything where you stand to GAIN a lot, and only risk a little.
According to traditional thinking, if you want higher returns, you must take more risk. Sometimes, this is true. But sometimes it’s not. Sometimes there are opportunities where only taking a little risk will still expose you to enormous potential reward.
And if you start really looking out for opportunities like this, I guarantee you you’ll find some.
Financially speaking, one possible example of this could be a well placed, inexpensive call option. (Call options are essentially a way to bet that a stock will go up.) If you purchase an inexpensive call option for a stock you think may go up a lot, you could be exposing yourself to the wonders of asymmetric risk/reward. That is because with call options, you have a finite amount of money you can lose, and a potentially unlimited amount of money to gain. (i.e., your losses are capped, but your gains are uncapped.)
*Obviously options trading entails risk. Do not consider this financial advice in any way; it’s simply to illustrate the concept.*
But here’s the bigger point:
Asymmetric Risk/Reward doesn’t just occur in investing. It’s EVERYWHERE.
Once you start looking, asymmetric risk/reward opportunities are everywhere.
Want another example of asymmetric risk/reward opportunity? Go meet new people. For very little risk, you may make a new best friend, meet a new romantic partner, or perhaps meet someone who will be an incredible business partner. Meeting new people is one of the best examples of asymmetric risk/reward, because you stand to lose almost nothing (i.e. – a little time), but you stand to gain possibly everything – romantically, financially, you name it. (And hey, if you don’t like the person, you don’t have to see them again.)
Or another underrated example? Cruise online job boards and look for new jobs – for the cost of zero dollars you just might discover something really interesting, fun, and lucrative. Heck, if you can do it without losing your current source of income, go try a second job – the risk is minimal; you can always just quit if you don’t like it. And you may love it and discover your next passion.
Or go to a bookstore or library. You may learn something incredible that could improve your financial life, your dating life, or your health, all for the price of a book (or for free, if it’s at a library). A single really good, informative read at the right time can literally change the course of your life for the better.
Or travel somewhere new, try a new class, or join some other community. You may discover somewhere, something, or someone you absolutely love, or people that can help you achieve your goals in a massive way. At the very least, you may meet someone that knows someone who could help you achieve your goals.
While all these are just examples, they have something in common: they involve little actual risk – they’re inexpensive, or don’t take much to try – but they expose you to enormous possibilities.
There really are huge, home-run opportunities out there.
By continually exposing yourself to massive upside – even without necessarily taking huge risks – you’re likely to enjoy some incredible successes.
Just keep your eyes open for these opportunities, these asymmetric risk/reward situations that cost very little but could potentially change your life.
Good luck, and may the odds be ever in your favor.
-Dolan