Risk Management - Murray Priestley

Did you know that the casino is an expert at risk management?

Risk Management is defined as the process of quantifying and managing risk. In the case of the casino, it casino controls which machine gives payback in terms of percentages. It also decides which machine is “risky” so it has to be pulled out. You won’t notice risk management at play because of the offers of free buffet or alcohol on the side.

Of course, you wouldn’t know the machines’ odds. Hence, you have limited ways to manage your odds.

There are some gamblers, however, that know at the back of their heads that the equation is lopsided but they gamble anyway hoping that the “payback percentage” will be in their favor. A payback percentage of 95%, is given to the gambler while the casino takes 5% of all money put into the machine. The casino mostly gives payback percentages between 90 and 97%.

Isn’t it enticing? The casino only takes 5% and pays a huge majority (95%) back to players. But it is getting 5% each time you play. In layman’s term if you start with $100, you’re only likely to get back $95. Play again, and you’re down to $90.25, then $85.73, $81.45, $77.37, etc.

If you are asking about jackpots. They are covered too. Can you picture out a slot machine? Do you really win when you hit the jackpot? You thought you did but you lost money in the process, too. These machines have been set for the casino to make money, not the gambler.

These are the reasons why it’s more fun to be the casino than the gambler.

In real life, who is the casino and who is the gambler?

Risk Management - Murray Priestley

image via pexels.com

The market itself is the “casino.” It is not owned or controlled by anyone. It is like a casino as it keeps the odds hidden from most people, and is the relentless arbiter of corporate life and death. It is the arena where companies battle for customers, sales and profits. Therefore, when one company falls, a competitor company rises.

Start-ups typically lose 70%-90% of their investments. They “gamble” by investing in expensive, time-consuming innovations that make little to no impact to the target market. Despite the credible theories, anecdotes and catchphrases from experts presenting pseudo science, the success rate of start-ups have not really improved since the time of Thomas Edison.

But with risk management, corporate innovators can shift from being gamblers to becoming casinos and not lose money in the long-run. Quantifying and managing risks is about looking into cold, hard numbers and to actually look closely if those numbers are reliable. You need to be informed of the odds of your every investment. You must also be equipped with the tools to tilt the probability of success in your favor.

You cannot rise from the 70%-90% failure rate if you just rely on pseudo science. You need statistical tools to make it happen.