This ratio is something we all have lived with, and will continue to live with until we are through with our active life. It is something few think about, but it concerns all of us in so many different ways. Let's take a look at what I am talking about.
When we were just little ones, we learned about the fact that in order to get something we wanted, we more or less threw a tantrum. The risk was that if we went too far, we were rebuked instead of being rewarded. The trick needed to turn the ratio in our favor was to learn just how far we could go and still have a positive result. That was our first lesson in the ratio, but not even close to being our last one.
When we became teenagers, we learned about the ratio when it came to the opposite sex. We took the risk of calling our "dream girl" on the phone to ask for a date. In my case, the fear of rejection was so great that it took a self "pep talk" to dial the phone. If I was turned down, I didn't lose money, but my ego took a tremendous hit. During those times I would have rather lost money, but that wasn't what it was all about. The reward was the date, and I found it always seemed to be greater than the risk. After a while, the rejection became less significant, although much too real at times, because the reward got better and better.
Financially, many of us faced the cost of college and found it daunting, even though in my day it was relatively inexpensive. When I graduated from high school, I was offered a surveyor's job for the City that paid $400 a month. The temptation to take the job was great and for a good reason. When I got out of college four years later I got a job at the bank for $300 a month. The decision to pass on the surveyor's job became easier when my father said I was going to college – period. The risk of disobeying my father far outweighed any reward I could think of – period.
Without belaboring the point, one can point to many instances of risk-reward situations that help shape your being without ever thinking of those instances in that way. Which leads me to the main part of the thesis. What is the risk-reward ratio? Why is it important to make use of in our lives? This ratio is a way to determine if risk, especially financial risk, is worthwhile when we compare it to the reward we might get from the action we are contemplating. Basically, how much could we lose from our plan compared to how much we can gain?
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.