A Personal Finance Decision

This is the third post in a series on decision making.

If you have gone through the first posts in this series, you should start to have a handle on how you make decisions.  The first post challenges your intuition, and the second presents some explanation of how you were likely to process the information.

Sometimes, it helps to get personal. So here are some new decisions for you that hit your wallet. In fact here are two decisions that might surprise you in how you think about them.

Decision number one:

If you had to choose one of the following two options, which would it be? Quick, decide!

Choice 1 Choice 2
an 80% chance of winning $4,000 and a 20% chance of winning nothing

-or-

a 100% chance of receiving $3,000

Almost everyone looking at this will think “That’s easy”. But it doesn’t mean they would make the same choice.

Decision number two: Now which would you choose from the following two options? Quick, decide!

Choice 1 Choice 2
an 80% chance of losing $4,000 and a 20% chance of  breaking even

-or-

a 100% chance of losing $3,000

In a study, 80% of the subjects facing decision #1 chose the certain outcome (choice 2), even though the gamble had a bigger payoff.

When faced with decision #2, 92% of the respondents chose the gamble, even though its mathematical expectation of a loss of $3,200 (80% times 4,000) was larger than the certain loss of $3,000. When the choice involves losses, we are risk seekers and not risk averse.

Did your choices change dependent on gain or loss?  Or did you stick with risk in both cases?

In HR jobs, we frequently make decisions that impact people. We decide on options that have both a business impact and an employee impact. Do you know where you are putting risk ahead of certainty? There’s nothing wrong with that, but you should understand your thought processes in making that decision. Do you think you have a consistent process?

Tomorrow, we’ll take a look at a decision process that could prove to be the make-it-or-break-it moment for an HR leader.

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