If You’re Not Gambling, You’re Losing: A Lesson in Probability & How Life Works
I want to make a bet with you. I’m going to flip a quarter. If it lands heads up, I’ll give you $200. If it lands tails up, you owe me $100. Would you take it?
The Risk-Averse Mind
Chances are you thought about it shortly and said, “No, I don’t think I’ll take it.” You’re pretty smart though, you KNOW that this bet is in your favor. The expected value is $200 x 50% — ($100 x 50%) = $50. Mathematically you SHOULD take this bet, but you don’t because losing $100 hurts more than winning $200 feels awesome.
This was the scenario posed by Daniel Kahneman in his book, Thinking, Fast and Slow which covers a wide array of biases that are built into the human race. As soon as I finished the chapter on this topic, I knew I had to write about it — it has forever changed the way I view my day to day life.
Back to the bet. Most people would say no since $100 is nothing to sniff at for the average person. That’s completely understandable. But what if you could make this wager 100 times? You’d be a fool to turn this down. As said in Kahneman’s book, “The aggregate gamble of one hundred 50–50 lose $100/gain $200 bets had an expected return of $5000 with only a 1/2300 chance of losing any money and merely a 1/62000 chance of losing more than $1000.” $5000? Sign me up!
Here’s Where You’re Losing
Once again, we know that statistically we should take the single bet too, but we don’t because losing hurts much more than winning heals. The only reason we took the second one was because the probability of losing was so diminished that the chances of being hurt seemed miniscule. I’m asking you to stop thinking like this. This mentality is costing you your life’s potential.
If you would take the multiple bet in life, you’d be foolish not to take the single one. Think about this. Every month, week, or even day you are presented the single bet in some way, shape, or form. Because of the way that your mind works, you turn this bet down almost every single time. Why? As a human being, you have a limited view on the proposal placed in front of you in the grand scheme of things. When you aggregate all these single bets across your life together, the chances you’ll come out on top overall are extremely high. By turning these chances down, you’re constantly leaving money on the table. Life in itself is the 100 bet scenario.
Of course you’re going to lose a few, but you’ll win some as well. As long as you keep this in mind, you’ll be alright. Financial traders do this day in, day out, every day.
Now, just like Kahneman, I have to give a disclaimer. This thought is only going to work with “bets” where there is a good upside and you have a decent chance of succeeding. Don’t expect to become the CEO of a multinational corporation if you’re taking multiple chances with a 2% chance of success and a large downside.
I’m writing this the day after I quit my first post-MBA job to join a startup as well as work on a few side ventures with some friends. I have quite a few bets going at the same time right now. I could lose on every single one of these, but I’m fine with that. I can always bounce back. But…if these hit, life will be pretty interesting over the next few years. My ask is that you go grab your own dice.