This is why many people say that lottery tickets are not wise investments, even though they have appeal because the reward is so high and the risk is so low. Remember that you only get any reward if you actually win. All the other variables are important, but in some ways this variable is the most important. The next variable to consider is the probability of winning the game. The first one may be favorable to people who prefer lower risk and the second will be favorable to people who prefer higher reward. For example a risk of $1 and a reward of $2 and a risk of $100 and a reward of $200 have the same risk reward ratio, but they are inherently different gambles. Namely, you lose information about the values of the risk and the reward. Also because the risk/reward ratio divides two numbers you lose information. When the risk reward is higher often the probability of success will be lower, or the opportunity will be much harder to find resulting in a greater effort to find.
![risk probability game risk probability game](https://daroolz.com/wp-content/uploads/2020/09/risk-attackerdiceodds.jpg)
A higher risk reward ratio is naturally better that a lower risk reward ratio, so the risk reward ratio essentially tells you how much you how good a possible investment is.
![risk probability game risk probability game](https://i.pinimg.com/originals/62/8b/68/628b68942499a24183651c2ffbe35d14.jpg)
The risk reward ratio is basically a measure of how much you have to gain, considering how much you have to lose. For a fair coin the probability of winning is 0.5. Notice so far we have said nothing about the probability of winning. Your risk reward ratio is your risk divided by your reward so $2/$1=2 Notice as a side note that the final answer is a ratio and therefor unitless. The is nothing particularly interesting about this game, but it is very simple to analyze mathematically. If you win you receive double what you put in $2, and if you lose you lose your $1 which is what you had to pay to play. A very simple game is to flip a coin and bet $1. We also want to quantify the risk and the reward as measurable things so in this case we will use money. The simplest way to do this analysis is to use the risk reward ratio. It is also possible to do a quantitative analysis which is what the rest of the article is about. This allows you to do a qualitative risk analysis which means that it is generally based on if you feel a certain option is higher or lower than another option. When you invest in a high reward high risk stock, essentially you and the company you are investing in are playing together against fate and the high reward they pay you is kind of like a reward for sticking with them even though the odds didn't look good.
![risk probability game risk probability game](http://blog.markturansky.com/wp-content/uploads/2008/03/risk_chanceofwinning.png)
For other cases like investing it is more complicated. This is simply because you are playing against the casino and a win for you represents a loss for them. In casinos if there is a higher reward there will typically be a higher risk and/or a lower chance of winning. In general whoever is offering the deal wants to win something as well, so if they raise one of the variables they will typically want to lower the other for one reason or another. This can be explained by supply and demand. In general more favorable outcomes for one variable tend to result in less favorable outcomes for other variables. You can analyze many things this way as done in the table above. You can consider a large spectrum where you can win or lose by degrees, but analysis of this is more complicated so we will consider simple success/failure games although the ideas introduced can apply to a broader spectrum. For this article we will consider any sort of bet to be called a game which only can be won or lost.
![risk probability game risk probability game](https://media.geeksforgeeks.org/wp-content/uploads/20201227102811/BuildaDiceGameinAndroid.gif)
When you think about these things in your head, you preform a quick risk, reward, probability of success analysis. The chances of winning are tiny, but the reward is huge and the ticket didn't cost that much anyway. A great example is if you want to buy a lottery ticket. This is an introduction to the ideas of if you want to make a gamble.