Step Six – Assess Risk

Assessing risk is part of making a decision. Think about and identify the risks of each option. Decide whether the risk is necessary and take the risk only for clearly thought out reasons. Carefully evaluate what the consequences of failure will be and try to make an accurate estimate of the probability that the option will fail. Use this risk factor in evaluating the options.

The basic strategy for assessing risks is the Expected Value Calculation. In the basic risk evaluation formula, EV=PR, the expected value (EV) equals the prize (P) times the risk (R). This is usually used in evaluating investment opportunities and isn’t directly applicable to most major life, career, etc. decisions. However, the concept is useful in understanding risk:
• What is the Prize – what do you hope to gain. Be clear
• What is the Risk – Don’t be overly optimistic or pessimistic
• What is the Expected Value? Be realistic
In Joe’s case, for example, there is a risk that the stock market could take a severe downturn or that he would not be accepted into law school.