The introductory text reads Every choice involves risk. You face risk whenever the outcome is uncertain.

A graph below the text plots Wealth along the horizontal axis and Utility along the vertical axis. The positively sloped curve labeled Utility begins on the lower half of the graph and terminates on the right upper half of the graph. Three incremental points are marked on the curve in terms of increasing wealth with the first and second points closer to each other. An arrow pointing from the second to the third point along the vertical axis is labeled, ‘Utility gain from winning 20,000 dollars is smaller than’ and along the horizontal axis labeled ‘20,000 dollars gain.’ An arrow pointing from the second to the first point along the vertical axis is labeled ‘Utility loss from losing 20,000 dollars’ and along the horizontal axis is labeled ‘20,000 dollars loss.’ The second point corresponds to Initial wealth on the horizontal axis.

An illustration beside the graph reads as follows:

Diminishing marginal utility (less additional utility from each additional dollar) leads to Reject a fair bet (Dollars won equals Dollars lost, but utility won is lesser than utility lost). This leads to Risk averse which leads to Focus on expected utility equals p subscript a multiplied by U subscript a plus p subscript b multiplied by U subscript b plus ellipsis. This in turn leads to Risk is more likely to be worth taking if.

(a) Reward is large

(b) Stakes are low

(c) Not very risk averse

A sub heading reads Five strategies to reduce risk include:

Risk spreading: Break up big risks into smaller-stakes risks.

Diversification: Instead of one big risk, take many unrelated risks.

Insurance: Buy compensation if something bad happens.

Hedging: Find a risk to offset an existing risk.

Gathering information: Will reduce uncertainty.

A sub heading reads Evaluate payoffs and probabilities carefully, by avoiding these biases:

Overconfidence: Your forecasts are less accurate than you think.

Availability: Don’t be swayed by easily recalled events.

Anchoring: Don’t get hung up on an initial estimate or starting point

Representativeness: Look beyond how similar things are. A note pointing to the four probabilities reads Assessing probabilities.

Focusing illusion: Think about what you’re not thinking about.

Loss aversion: Don’t be more sensitive to payoffs appearing as losses.

A note pointing to the two pay offs reads, Assessing payoffs.

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