Using EV(Expected Value) on Life to make better decisions.

For a two month period, poker was my life. I’d spend four hours a day after work devouring every poker book out there, peppering my friend with poker questions, analyzing pot odds & equities, and thinking through hand combinations. I didn’t go out on Friday nights. I spent my Fridays with old NITS( just imagine an uptight, hand-shivering, wrinkle-skinned, 70 year old) and crazy, rich, middle-aged, money-addicted Asian dudes(gambling addicts), flicking chips and folding hands, for hours and hours at Commerce Casino. I’d ride the rollercoaster of emotion, feeling the euphoria of winning $560, while experiencing depressed, blood-drained feeling of losing my entire buy-in($500) within 20 minutes. And although poker can have a reputation as ‘degenerate gambling’, many of the nuances in the game were windows into amazing life lessons.

Poker is a game of decision-making with imperfect information. You can’t see your opponents’ hands. Chess, on the other hand, is a game with perfect information. You can see all the pieces on the board.

Life is a game of decision-making with imperfect information. When you make a major life decision(quitting your job, getting married, moving to a new city), you’re making the decision with a limited amount of information. You might want to move from Los Angeles to New Orleans, but you don’t fully know what type of people live in New Orleans, the culture and job prospects. When you quit your consulting job to look for something better, you might think you landed your dream job at a high-growth startup, but you don’t actually know if you actually like the heavy workload accompanying most startups. You might hate it.

In poker, there’s a concept called E(V). If you’ve taken a basic math class, you’ve probably heard of this concept. Here’s the formula:

                                    E(V) = (outcome) x (probability of outcome)

I don’t wanna get too math-y, but the idea here, is that at the poker table, I want to make money. So every decision I make should be aimed at making money. There are times I’ll lose money. But I know, that if I want to make money, I need to make good decisions. I want to make +EV(Expected Value) decisions. Even if I have pocket Aces, three opponents go all-in( which means I stand to win $1,500), AND the math says I’m supposed to win( 80% chance) some guy might get lucky and hit that 20%(yes, I’m salty).

If I extrapolate this concept onto my life, I want to be making life decisions that, in the long run, will provide a +EV return. I can make a good decision that goes sour, but as long as I continue to make good decisions, I’ll benefit in the long run.

To make this model easy to understand, let’s re-write the formula to account for both the risk of a good thing happening vs. the risk of something bad happening:

E(V) = (positive outcome) x (probability of positive outcome) + (negative outcome) x (probability of negative outcome)

So how do we take this concept and apply it to our life? Let’s walk through a few examples.

Let’s use girls first( since that’s what’s usually on my mind lol).

Let’s say I see an attractive girl on the street. She’s totally my type. Hipster-ish looking, kinda innocent, smiling and looks like she’s relishing in the moment.  If we apply this E(V) formula to the situation:

E(V) = (positive outcome = we end up dating/become friends) x (probability of going on date/friends) + (negative outcome = she rejects me) x (probability of getting rejected)

If you look at my situation, intuitively, you’ll see that the E(V) in this situation is SUPER high. Dating someone or making a new friend adds enormous amount of happiness to my life, whereas rejection is the WORST thing that could happen, in that case, I just move on with my life. I would be in the exact same spot, if I didn’t talk to her. There’s only upside in this situation, no real downside. But unfortunately, there are many moments I don’t do it :(

 In another situation, let’s say I’m a parent with two children. I don’t like my job and want to quit to start my own business. However, my business isn’t making enough money to support my family. If I plug into the E(V) formula:

E(V) = (positive outcome = business takes off) x (probability of outcome) + (negative outcome = no job, no money, risk safety of kids) x (probability of outcome)

Looking at this situation, the probability of most entrepreneurs succeeding is <10% while the probability of the negative outcome is pretty high( 90%+). In the long-run, I’m making a negative EV decision here. The smarter decision for me, would be to build the business until it’s earning enough money to support my family, ensuring child safety, before leaving my job.

Another situation, let’s say that I’m 22 years old, I have $10k in my bank account and want to delay working for a year to travel the world:

E(V) = (positive outcome= amazing adventures, friends, life experiences) x (probability of outcome) + (negative outcome= One step behind in career, forego earning a salary for a year) x (probability of outcome)

I actually feel like this situation, depends on my values. If I value adventure/life experiences more, my positive outcome would increase. I would think that starting work at 22 vs. 23, doesn’t make much of a difference in the long-run and the value I’d get from life experiences would outweigh not working, giving me a positive EV. If I valued careers/money, the negative outcome would be higher. I’d see that a year of not deliberately building skills, delays my journey towards mastery/excellence. It’d be $30k not added to my savings, which compounded over 20 years on an 11% return, would be $518,620.48 I’d be foregoing.

And this difference in viewpoint leads to my next point…….

Weaknesses of this model

Judging value and probability is entirely objective. For me, I value learning over security, which means my equation is gonna be drastically different from someone who values a safe, secure life. Because every person has a different set of values, their EV calculation is gonna be different.

As for probability, unlike in poker, blackjack, there’s no formula to calculate an exact number. In life, there are just too many moving parts. The only thing I can do, is make my best guess. And my feeling, is that we all get better at estimating our % with more life experience & more decisions made.

But what about going for my dreams?

There are a lot of professions that may seem to have a – EV, especially artistic professions like writing, painting, dance. I’m not in a position to say whether these careers are positive or negative EV. But my thought, is that people who choose to go into a –EV career, go into that career knowing the odds are stacked against them, but doing it anyways. To quote Elon Musk(again):

“When something is important enough, you do it even if the odds are not in your favor.”

And life isn’t a casino. You have control over your odds :)