Expected Value in Practice, Poker and Business
I was inspired by Ray Dalio’s post the other day to finally address a topic that I have not been quite sure how to write about nor have shied away from in the professional world. Mr. Dalio says expected value calculations should be the determining factor behind every decision we make. While not everyone would necessarily agree nor successfully execute on that idea, that also is not an especially controversial position to take. It is an acquired still and it takes practice to develop that mindset. Where I learned to quickly make and use expected value calculations to drive decisions is perhaps a little controversial in the business world. I developed those skills at a poker table.
I took statistics and probability classes in both high school and college, so I was familiar with the concept, but it was poker that brought the idea from something that is a pencil and paper calculation based on predictable factors to an approach to all decisions where lack of anything like complete information is the norm. I was a solid poker player, through college playing produced comparable income to the number of other part time jobs I worked to support myself and I still enjoy the game quite a bit, though not as much as I once did. All the enjoyment and the modest income helping me when I was a broke college kid trying to make ends meet pales in comparison to the lessons learned in terms of expected value calculations.
In poker you must:
Observe and catalog many disparate pieces of information. What the cards say, what your competitors are doing and even what you signaled to your competitors.
You must evaluate all those pieces of information quickly and efficiently.
Then you need to decide the action to take based on that information and you must do so quickly.
Unless you are world class, you must accept that information is far from complete but still act confidently based on the most likely outcomes as you see them.
Observe the outcomes unemotionally, whether positive or negative, learn from them and quickly get ready to do it all over again.
That is not much different than what I do in my day to day. That concept of always striving to objectively make the soundest decisions based on the information at hand, no matter how thin the information has served me incredibly well in my career. Yet, I do not often bring up the thousands of hours of experience I have doing just that at a poker table because I think there is some level of taboo with being a gambler. I would love to see that normalized, because in truth poker and other skill-based gambling gets a bad rap. Poker, played correctly, is far closer an exercise to chess or investing than it is to pulling the handle on a slot machine.
Like many of Ray Dalio’s daily principles the concept goes well beyond business. I try to make every decision based on expected value and encourage others to do the same. It really grates on some people because it feels alien to think about something like who you are going to date based on expected value. It can also lead to vastly different answers to the same questions because everyone has different information and perhaps defines value differently. That is beyond okay, it is extremely fascinating. Nevertheless, I have yet to come across a better way to make any decision than to make my honest best attempt at weighing the expected net value of all possible approaches.
One word of caution to end on, this approach can lead directly to analysis paralysis. Poker was also a great training tool for this because your competitors can call the clock on you to start a count down until you must decide. When applying this approach to life and business, it is best to also bake the time spent evaluating different possible choices into the expected value calculation itself. Yes, I could agonize about a decision for another day, week, month, etc. to improve my chances at deriving slightly more value, but at some point, the cost of that analysis outweighs the incremental gain to my expected outcome and certainly the possible gain from pulling my attention away from other possibly as important decisions.
There you have it. Expected value calculations are the right way, maybe the only right way, to make decisions. If you struggle with them, consider giving poker a try and I would be happy to help you get started!