Learning Activity #2: Related to Theme 2

Risk aversion and risk tolerance are two factors that affect decision making. Take the quiz found in this week’s readings… Are You a Risk Taker? Based on the findings how are you likely to solve the scenario of the game show host challenge in week three’s opening?

• The game show player has the option to play or walk away. Discuss risk aversion and risk tolerance for both possibilities.
• Support your ideas, reasoning and conclusions with the course material.
• Use APA in all postings.

The game show host is standing next to you on the stage, saying: “You have $30,000. You can keep the money or decide to play. If you keep the money, you do not play and have $30,000. If you decide to play, you give the host the $30,000. Behind one of these three doors is $100,000. If you choose the wrong door, you go home without any money. If you pick the right door, you receive $100,000.” Do you do play or walk away?

Risk Aversion and Risk Tolerance are two factors that affect how we make decisions. Decisions that involve uncertainty means a desired outcome may not actually result. Risk tolerance is dependent on what is at stake and varies with one’s risk tolerance. When risk is understood and there is a willingness to accept that risk the decision-making process can be more effective.

Risk can often play into the effect of the bias factors. For instance, Outcome Bias, judging the outcome rather than how the decision is made, may play into taking a risk you might not have taken if the process had focused the decision. Choosing to play the doors in our scenario above or choosing to drive while drunk are good examples of the interaction between risk assessment, outcome bias and decision making.