This article is taken from the book "The Short Book on Investments" by Dr. Jin Won Choi.
Suppose someone proposed the following bet. He will flip a coin. If it turns heads, you win $22,000; tails, you lose $20,000. Would you take this bet? The chances are, you wouldn’t. According to research, most people wouldn’t take this bet either (but a few would).
Why wouldn’t people take the bet? On average, people will make money if they take the bet. Except, the human mind instinctively understands that this bet is risky. For most people, the potential to earn money is not worth the risk.
Every investment has some risk. With each investment, not only should you look at its potential returns, you should also look at its
risk. Like siamese twins, risk and returns always go together. If returns are high, it’s usually because risks are high, and vice versa.
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