← Decision Frameworks
Decision Frameworks · Card 3
Expected Value Thinking
Weigh outcomes by likelihood.Not by how big they look.
- It feels like
- On average
- Wins 9 times in 10
- Negative
Weigh outcomes by how likely they are, not just by how big they look; a small chance of a huge loss can outweigh a large chance of a small gain.
90% chance+₹1,000
10% chance−₹20,000
Small, likely gainRare, large loss
In Practice
A trade with a 90% chance of a small ₹1,000 gain and a 10% chance of a ₹20,000 loss has a negative expected value, even though it "usually" wins.
Generic Example
A raffle with a 1-in-1000 chance to win ₹5,000 for a ₹100 ticket has a worse expected value than it feels like buying it.
Ask yourself
If I made this exact bet 100 times, would I come out ahead on average?
Shows up in Probability and Basic Statistics