Page 231 - Ray Dalio - Principles
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expected value, which in this case is positive (+$20). Once
you understand expected value, you also understand that it’s
not always best to bet on what’s most probable. For example,
suppose something that has only a one-in-five chance (20
percent) of succeeding will return ten times (e.g., $1,000) the
amount that it will cost you if it fails ($100). Its expected value
is positive ($120), so it’s probably a smart decision, even
though the odds are against you, as long as you can also cover
the loss. Play these probabilities over and over again and they
will surely give you winning results over time.
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:
