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What is Expected Value and How it Works?

What is Expected Value and How it Works

While we humans hold ourselves in a rather high regard, we would probably seem quite funny to greater intelligence. We see things that are not there and it is easy to understand something how we like it. It is the same deal with the expected value, which is more of a quirk than anything.

Expected value is a viable theory in economics and mathematics that is made in either immense or very limited scales where a lot of factors are irrelevant. But, when it comes to individuals who invest, gamble, or play, it is a whole different animal.

There are three, rather human, emotions, and mistakes that make us over or undervalue our chances, even if we know what they are mathematically:

  1. Seeing lifelong averages as daily
  2. Self-placing above average
  3. Counting from the maximum downwards

You might recognize some of these from your everyday life. And, while the reasons why these psychological processes happen are very complex and not even entirely known to psychiatry, how to mend them is rather easy.

By being mindful of the fact that our intelligence and wisdom as humans are limited by default and that everybody else is the hero of their own story as well, we can make better predictions.

In the end, it is better to be a pessimist proven wrong than an optimist experiencing the same.

Hero of Your Own Story

To brashly misquote a movie: ‘’We live in a society.’’ From infancy, we are thought to cooperate and work with others. Those who are counted as well-socialized are people who can recognize the thoughts and behavior of others and act accordingly.

But, in the end, the only mind we have access to is our own. Even that is not complete access, but rather sporadic.

Because we only have glimpses of other people’s thoughts and full access to our own, we tend to think of ourselves as ‘’rather smart’’, at least compared to the average. Self-estimated Intelligence (SEI) is across the board over-estimated in all groups.

When you add things like testosterone to the mix, the results get even more shifted.

Those who can’t introduce these internal factors into their thinking are bound to make riskier investments, as well as gamble with lower chances for higher stakes.

Finally, some from that group might see losses as a personal slight against them and not a simple rule of large numbers. Investing, gambling, and playing games is a good thing and should be done, but a healthy dose of Stoicism is necessary.

Infinite Percentages in a Finite Game

Online gambling is a great tool to investigate what real chances are compared to actual winnings in the game. Because of a vast number of players and even more games, we can emulate an infinite game.

Those familiar with these games will notice something called RTP or return to players. Online slots and pokie games have the highest RTP, often over 95%. This means that all players, in all games, will see 95% of their money returned to them.

But, we are not playing all games as all players. We are just one person playing a rather small fraction of games. Here we have a tendency to apply the same security as the global population and then even overestimate the 47.5% chance that we will win.

In fact, with an RTP of 99%, our actual chance of winning is 19% on every single roll. And, only 3.5% of all players will win big at some point.

Yes, you might be ‘’The One’’, but you also probably aren’t. You shouldn’t risk your current standing on an off-chance that you might change your fortune.

That is why smart gamblers play for entertainment and smart investors look for creating value. Gaining money is a side-effect of making good decisions and investing time.

Fortis fortuna adiuvat! Fortune favors the bold. But this is only if they are well-prepared.

Missing Tile Syndrome

Finally, we have an emotional fact that is much more present when discussing self-improvement and theology than when discussing math and business, but it applies very much to the latter.

The idea is that even if there are thousands of beautiful tiles on a wall, we will only focus on the ones that are missing. We will predict the best and maximum theoretical outcome and count from there.

Most people have met this issue in education where students count as if they are supposed to answer all the questions correctly and only count where they made mistakes. In the end, their score is always lower than what they predicted.

For gamblers it is slightly easier, as they need only the philosophy of Kenny Rogers from ‘’The Gambler’’; Don’t count your money, until the deal is done.

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