Though we mostly don’t carry out these calculations explicitly, we constantly make them intuitively. For example, when you decide to take an umbrella to the store even though there’s just a 40 percent chance of rain, or you check your phone to confirm the directions somewhere, even though you’re almost certain you know the way, you’re making expected value calculations.
Sometimes it’s smart to take a chance even when the odds are overwhelmingly against you if the cost of being wrong is negligible relative to the reward that comes with the slim chance of being right. As the saying goes, “It never hurts to ask.”
This principle made a big difference in my own life. Years ago, when I was just starting my family, I saw a house that was perfect for us in every way. The problem was that it wasn’t on the market and everyone I asked told me the owner wasn’t interested in selling. To make matters worse, I was pretty sure I would be turned down for an adequate mortgage. But I figured that it wouldn’t cost me anything to call the owner to see if we could work something out. As it turned out, not only was he willing to sell, he was willing to give me a loan!
The same principle applies when the downside is terrible. For example, even if the probability of your having cancer is low, it might pay to get yourself tested when you have a symptom just to make sure.
To help you make expected value calculations well, remember that:
Raising the probability of being right is valuable no matter what your probability of being right already is. I often observe people making decisions if their odds of being right are greater than 50 percent. What they fail to see is how much better off they’d be if they raised their chances even more (you can almost always improve your odds of being right by doing things that will give you more information). The expected value gain from raising the probability of being right from 51 percent to 85 percent (i.e., by 34 percentage points) is seventeen times more than raising the odds of being right from 49 percent (which is probably wrong) to 51 percent (which is only a little more likely to be right). Think of the probability as a measure of how often you’re likely to be wrong. Raising the probability of being right by 34 percentage points means that a third of your bets will switch from losses to wins. That’s why it pays to stress-test your thinking, even when you’re pretty sure you’re right.
Knowing when not to bet is as important as knowing what bets are probably worth making. You can significantly improve your track record if you only make the bets that you are most confident will pay off. The best choices are the ones that have more pros than cons, not those that don’t have any cons at all. Watch out for people who argue against something whenever they can find something, anything, wrong with it, without properly weighing all the pluses and minuses. Such people tend to be poor decision-makers.
Prioritize by weighing the value of additional information against the cost of not deciding. Some decisions are best made after acquiring more information; some are best made immediately. Just as you need to constantly sort the big from the small when you are synthesizing what’s going on, you need to constantly evaluate the marginal benefit of gathering more information against the marginal cost of waiting to decide. People who prioritize well understand the following: All of your “must-dos” must be above the bar before you do your “like-to-dos.” Separate your “must-dos” from your “like-to-dos” and don’t mistakenly slip any “like-to-dos” onto the first list. Chances are you won’t have time to deal with the unimportant things, which is better than not having time to deal with the impor-tant things. I often hear people say, “Wouldn’t it be good to do this or that?” It’s likely they are being distracted from far more important things that need to be done well. Don’t mistake possibilities for probabilities. Anything is possible. It’s the probabilities that matter. Everything must be weighed in terms of its likelihood and prioritized. People who can accurately sort probabilities from possibilities are generally strong at “practical thinking”; they’re the opposite of the “philosopher” types who tend to get lost in clouds of possibilities.