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Powerball and the Risk Informed

In general, there are 2 camps of people:

  1. The Risk Averse.
  2. The Thrill Seekers.

Interestingly enough, you may fall into one camp in particular contexts, and in a different camp in other contexts.

And, depending on the context, you feel fully justified in your camp.

Is there a better way?

The Risk Averse look solely at the cost and wonder, “what if it all goes wrong?“.

The Thrill Seekers look solely at the potential reward and wonder, “what if it all goes right?“.

Rather than blinding yourself to half of the equation, look at both. Become Risk Informed.

In statistics, we have the concept of “Expected Value”. This is the liklihood of gains (and losses) multiplied by how likely they are to occur.

For example, the odds of winning the $2.04 billion powerball were 1 / 292.2 million. In other words, just looking at the face value of it, 2 billion / 300 million would mean a single entry would have an expected value of $6.66! With the cost of entry being $2, it looks like you will be making about $4.66. However, once you add in the likelihood of splitting the reward with other winners, taxes, and so on, the total expected profit, even with a jackpot of $2 billion quickly goes negative.

What if instead of betting on random chance, you bet on yourself?

What if instead of playing things with fixed probabilities not in your favor, you played things where the longer you played, the more likely it was that you won?

That’s running an intentional, strategic business.

chess

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