Take action in your life (career, relationships, investing) that are highly skewed in favor of positive expected outcomes for you relative to negative expected outcomes
Key questions to ask in each situation:
What is the upside (positive) benefit if I am right?
- be careful to avoid overoptimism bias
- Great reads:
- Misbehaving by Richard Thaler
- Nassim Nicholas Taleb's risk management "trilogy"
What is the downside (negative) affect if I am wrong?
- be careful to never take a risk that will "end the game" for you if you lose (physically, emotionally, financially)
- Great read for entrepreneurs: Great by Choice by Jim Collins (especially recommend the chapter on "Luck")
- Great read for investors: Unknown Market Wizards by Jack Swagger (highly recommend the his other Market Wizards books, as well)
- make sure to check your assumptions (What am I missing? What am I not seeing?)
- Great read for entrepreneurs: The Road Less Stupid by Keith Cunningham
What are the probabilities that I'm right/wrong?
- avoid confirmation bias (only seeing/believing evidence that supports what you want to believe)
- use base case assumptions to level set your expectations
- great read: Thinking Fast and Slow by Daniel Kahneman
- Adjust your assumptions to avoid overconfidence and uncertainty risk to your assumptions
- recommendation: Learn about the "Kelly Criterion" and the method that many gamblers/investors recommend of betting "half kelly"
What is my decision/choice?
- Take those actions that have a large skew (preferably 2x or greater) of positive expected value versus negative expected value
- remember that "expected value" is the product of multiplying the probability X outcome. Yes, a winning lottery ticket has a very high positive outcome, but it's expected value is very low when you multiply the outcome by it's probability of occurrence.
- Minimize the negative expected value
- in investing, this could be done by placing a "stop loss" order or buying an option rather than the stock itself.
- in business, this could be buying insurance (e.g., worker's compensation, fire, life, etc.)
- Size your commitment/investment according to the level of positive optionality
- Investment example: if you are buying 2 stocks and one has a high likelihood of tripling in five years while the other has a chance of doubling, you would better off investing more in the one more likely to triple rather than equal weighting them in your portfolio. This seems obvious, but is very often not done as investors sometimes seek too much diversification in their portfolio
- Great investors to learn from regarding this:
- George Soros
- Stanley Druckenmiller
- Charlie Munger
- Great read: Charlie Munger by Trents Griffin
- Career example: If you have 2 side hobbies with one that keeps you entertained (e.g., playing a sport) while the other is something that you'd like to become a second career that could provide you with greater long term happiness, you should probably be allocating much more of your available time towards the career-changing opportunity.
- Good read: The Compound Effect by Darren Hardy
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