Having a hard time making decisions when it comes to opportunities that involve money?
I am going to teach you how to start making decisions like a millionaire. You need to understand that you can evaluate every situation by calculating risk using expected value (EV).
I'm sure you are wondering what is the expected value. Expected value (EV): The sum of all possible values for a random variable, each value multiplied by its probability of occurrence.
Sounds complicated, I like to break it down in a much simpler way. EV is the sum of a situation when you evaluate its possible outcomes. The EV will be a negative or positive number. If the EV is positive you should move forward with the best decision. If the EV is negative, you shouldn't move forward and turn the opportunity down.
Once you gain the habit of looking at all situations in terms of the expected value you will be able to easily maneuver through life making only good decisions with the best outcomes.
I see a lot of people struggle with making decisions when they are faced with an opportunity, when in reality in some cases, it really should be a no brainier. Let me show you a few examples of expected value at work.
Bare with me there is some math involved, but once you become good at spotting positive EV plays it will become much easier to implement and execute.
Example #1
A simple example of EV is flipping a coin. Say you and a friend bet each other $1. You pick heads, your friend picks tails. The winner takes all $2. Both of you have a 50% chance of winning the EV is $1. There is no edge it is a neutral EV play.
50% of the time you'd lose $1
50% of the time you'd win $1
Loss: 50% x (-$1) = -$0.50
Win: 50% x $1 = $0.50
-$0.50 + $0.50 = $0
EV = $0
So to apply this your everyday situations you want to take a look at a situation, determine the probability of each outcome good or bad. Then calculate the value each outcome is expected to occur.
Example #2
You usually ride the metro train to work, today the trains are running behind schedule. There is a 40% chance you will not make it to work on time. If you are late you will lose $20 worth of pay. If you take an Uber there is a 60% chance you are on time you will gain $40 in pay.
40% of the time you lose $20
60% of the time you gain $40
Loss: 40% x (-$20) = -$8
Win: 60% x $40 = $24
-$8 + $24 = +$16
EV = +$16
You would want to take an Uber any time there is a chance of you being late when taking the train because it is a +$16 EV decision
Example #3 Real World Scenario
In this example, I will show how I used EV to help someone on Twitter decide if they should go to a conference or not. She had currently been applying for jobs, but no luck so far so I recommended that she attended the NSBE Convention. She was apprehensive about the cost of the convention, but I assured her that the worst-case scenario is that she would lose the amount of money it cost to attend ($500). It was a low probability (30%) that she would leave the convention with no offers. Best case scenario 70% probability that she would leave with at least one offer of an estimated $65,000 salary.
30% of the time you lose $500
70% of the time you gain $65,000
Loss: 30% x (-$500) = -$150
Win: 70% x $65000 = $45,500
-$150 + $45,500 = +$45,350
EV = +$45,350
She would want to go to the convention because it is a +$45,350 EV decision.
I didn't even do the math on this decision at the time, because I knew that it was a positive EV play by such a large amount that it was a no brainer.
THE RESULT OF A POSITIVE EV DECISION 😎
I want to help people gain the confidence to take calculated risks without fear and know that they are making the right decision. To stop going back and forth about what they want to do and to always take the positive EV play when it presents itself.
“Reverse engineer your life. Live a life of abundance.”
-Beez
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