Humans are reactionary and emotional. We have a tendency to base our decision-making on recent events that affect us emotionally, rather than sticking to logic to form the best policies.The vast majority of us consistently take very negative expected value lines in our everyday lives, and unfortunately, our political system is no different. Most people handle risk poorly because they do not understand expected value. In my opinion, understanding expected value is the most valuable lesson learned in poker that can be carried over in everyday life. Think about a couple of major events that occurred in the past 15 years and ask yourself two questions:
1) Did the risk of those disasters increase following the disaster/event?
2) Did our response change?
Almost universally the answer is that the expected value did not change, but our responses did.
Major Event #1
Did the risk/EV of a nuclear catastrophe increase after Fukushima?
No, the expected value of a major catastrophe remained the same both before and after. Risk factors take a long time to change. It is possible that the risk of a tsunami increased as a result of climate change and thereby increased the risk of a Fukushima like event. Those kinds of changes don’t happen overnight though. However, in one day Fukushima reshaped energy policies around the globe. Why? Because we allow ourselves to be dominated by fear rather than understanding the risk and dealing with it appropriately. Am I saying we should put up nuclear plants everywhere? Absolutely not! What I am saying is that the risks have not changed in any significant manner post Fukushima. If nuclear power (with all of its inherent risks) made sense before Fukushima then it still makes sense after! If nuclear power (with all of its inherent risks) didn’t make sense before Fukushima then it still doesn’t make sense after! What we should be doing is focusing our attention on making sure our risk models are giving us accurate statistics from which we can take educated risks.
Major Event #2
Did the expected value of another 9/11 type terrorist event rise following Sept. 11th?
No, the expected value of a major terrorist attack on US soil was likely similar both before and after Sept. 11th. However, after Sept. 11th, the United States made major policy changes such as invading Afghanistan and Iraq (costing a tremendous amount of money and lives), and spending a tremendous amount of money creating the TSA. I am not going to pass judgement on whether or not these actions should have been taken, my point is that policy should be determined independent of a catastrophe occurring.
If we know there is a 5% chance annually of a terrorist attack that kills one thousand people, I think everyone would agree that is an unacceptably high risk. What if that chance was one in a trillion annually? Meaning that if you lived one million years, one million separate times, only one attack would happen. That would be a very successful terrorist prevention system, even though the risk would not be zero. So if a terrorist attack occurs tomorrow despite the chance of it being only one in a trillion, should policy be changed? No! In fact, by meddling with good policy based on results you increase the risk of creating bad policy. Frequently, the result of reactionary changes is inferior policy at a higher cost to society.
What about my personal life? How can a greater understanding of expected value help me make better personal decisions?
Micro Event #1
Does the expected value of you dying from cancer increase or decrease as a result of smoking two packs of cigarettes every day?
Yes, the expected value of you dying from cancer increases! Having said that, you may never die from cancer, and may live to the ripe old age of 100. However, by choosing to smoke two packs of cigarettes per day, you have reduced your life EV, and the expected value of you getting cancer has gone up.
Micro Event #2
Do you drink and drive?
If you do, this negatively affects your life EV. Sadly, this also negatively affects the life EV of others around you. You may have a few pints and drive home safely without harming yourself or anyone else. However, your chances of getting into a major accident increase significantly, and therefore you are lowering your life EV.
There are plenty of other examples on local levels of mini-disasters that lead to poor policy. For example, if a pedestrian gets killed at a street that lacks a marked crosswalk, residents often petition and get a crosswalk installed. However, we shouldn’t be focusing on that one crosswalk, but instead trying to identify the highest risk crosswalks in the city and prioritizing those. By doing so, we ensure the greatest number of lives are saved and injuries reduced. By spending our tax dollars on a “low-risk” crosswalk due to a single tragic event, we forego the opportunity to fix another “higher-risk” crosswalk. Our reactionary approach is inappropriate and consistently costs society money and lives. As any poker players knows it is important not to base your behavior on short-term results, rather you should focus on long-term expected value. The same holds true for life in general.
This post applies as much or more to non poker players than it does to poker players. So share this with your friends who may never have been exposed to the concept of expected value. Also, share it on Twitter and Facebook or just send out a good old fashioned e-mail to your buddies. Hope you enjoyed the post!