I overheard a conversation at a family gathering a little while ago and it reminded me that different people perceive risk in different ways. One member of the group, a young man, was discussing an upcoming visit to Las Vegas and trying to enlist companions to join him in riding at least one of the Strip’s roller coasters. Another member of the group, a middle-age woman, responded by saying “Why would you risk your life on a roller coaster at the top of one of the hotels? Why not do something safe like stay inside and gamble?”

Well, other than those few folks who are beaten-up by casino bosses in the movies, I suspect gambling is a pretty safe pastime but I found the contrast interesting. She regarded an activity engineered to provide participants with a thrill while being kept in complete safety as risky but an activity at which you’re virtually certain to lose (over time) as safe. There are five roller coasters operating in Vegas and each has an almost incalculably small chance of causing harm. At the same time, the gambling opportunities are almost incalculably large but the odds of losing range from as poor as about 20:1 in Keno to about 100:96 in Blackjack.

The odds of winning at poker fall somewhere in between, depending on which variation of the game you prefer. Poker is what’s known as a “zero sum game”. That is, all winnings are contributed by the other players: someone has to lose in order for someone else to win. Las Vegas poker still works that way with the dealer simply handling the cards. Those at the table are playing against each other and the winner takes all. Blackjack is a card game with a different slant. In it, the dealer plays against all gamblers, so any particular deal could result in more than one winner.

Gambling isn’t the only time that evaluating risks is required. In fact, risk management is at the heart of virtually all the planning we do on behalf of our clients. In helping them prepare for the future, we are often asked to help identify risks, classify their importance, then help decide which ones they should retain and which ones they should share with others - usually through some sort of insurance.

Proper levels of life and auto insurance obviously need to be established but deciding on appropriate coverage for an art or gun collection is also important, though perhaps a bit less obvious. Spring rains in the Columbus area have brought the 2008 flood to mind. As most homeowners know, lenders require flood insurance when the dwelling is located within what’s known as the “100 year flood plain”. Unfortunately, that designation neither guarantees that flooding will occur only once in every hundred years nor that other areas will remain unaffected. In the aftermath of the floods, some homes were rebuilt while others were total losses. Clearly, those homeowners with adequate insurance coverage retained the most options.

Insurance, like poker, is a zero sum game. If it hopes to survive, no insurance company can pay more out in claims than it receives in premiums. The current budget debate reminds us that even the insurer of last resort, the US government, can’t afford unlimited payments without sufficient income to support them.

Risk management is also an important component of every investment strategy. While investing in stocks is sometimes thought of as “risky”, sticking to “sure things” like Certificates of Deposit introduces its own special risk: that of running out of money later in life when a guaranteed return is too low to stay ahead of inflation.

How like or unlike Las Vegas is investing in the stock market? Well, even though investors make or lose money every trading day, investing has not proven to be a zero sum game. Capitalism tends to reward those who start businesses, along with the investors who provide financing. Even though day-to-day market movements are unpredictable, total market valuations have risen over the years and that has allowed for multiple winners. At Warren Ward Associates, we employ hedging strategies in an attempt to control the volatility of our clients’ portfolios. This approach allows them to remain in the market through its ups and downs and we utilize it for one simple reason: we like the odds of an eventual winning outcome.