Some of us might remember "expected value calculations" from school. It's not been the favorite part of my maths studies and I had mostly forgotten about it until recently. And honestly, it came to me as a surprise to find out that a lot of our decision making is based on conscious or intuitive expected value calculations.

Let me give you an example: if you are at a crossroads in a place that you know a little bit but not perfectly and you are not 100% sure if you have to turn left or right to get to your destination, chances are high that you take your phone out of your pocket and open maps to figure out what the right way is.

Without your phone the odds might have been 50/50 for you to take the wrong turn. They might even have been a bit higher depending on your location related knowledge. By looking up directions on your phone and making sure that you are going the right way you've increase the probability of success to 100%. Subconsciously you've made an expected value calculation, estimating the gain and the loss of going the right or wrong way and then increasing the probability of occurrence by gathering additional information.This is a perfect example of a decision making process based on the expected value of the outcome.

Here's a version of how to calculate the expected value for multiple events: if there are for example two possible outcomes in a decision making process, one positive, the other negative, the formula looks like this: E(X) = ∑X * P(X) - it basically consists of the value of the positive outcome multiplied by it's probability plus the value of the negative outcome multiplied by it's probability. Let's say you toss a coin, heads is the positive outcome, tails the negative outcome. The probability is 50% (.5) for each. If heads is the results, you'll win 100 EUR, otherwise you'll lose 80 EUR. The expected value therefore is positive 10 EUR -> .5 x 100 + .5 x (-80) = 10 EUR

In real life situations expected value calculations usually get much more complicated than that. Take regular medical check-ups for example. The chances for some sorts of cancer or other diseases are usually quite low. But if a disease has occurred a bit more regularly within your lineage, you might assume that the probability of inhibiting the disease is higher and therefor you'd reach a different expected value than a person without any signs of the disease in his family tree. As a result you'd probably go to physicals more regularly.

The core benefit of making decision as expected value calculations lies within the possibility to increase your odds or probabilities of the desired outcome. This of course depends on the amount of effort you want to put into raising your chances, e.g. through gathering additional information or spending more time and money. However, raising the probability of being right is usually valuable, no matter what your current probability already is. Think of the probability as a measure of how often you are likely to be wrong. Raising the probability of being right by, let's say, 33 percent means that a third of your decisions turn from being wrong to being right.

Besides the importance of increasing the chances of being right or making the right decision, I have learned that sometime it's smart to take a chance even if the odds are overwhelmingly against you but the negative outcome is negligible compared to the reward that comes with the slim chance of being right. Our brains are wired to make decisions based on having as few regrets as possible. We are pondering the benefits that we miss out on if we chose A instead of B and then depict how bad we would feel by not having the benefits of B.

Most of us have been in a situation where we asked ourselves "What if he/she says no?" - You'd feel bad or hurt, of course, but what if he or she says yes? Chances might be slim, but the benefits could be huge. In other words: it never hurts to ask! The only thing that might get hurt a little is your pride or your ego, but that's something worth overcoming...

If you are interested in more aspects of effective decision making, please follow this link to Weekly Blog #17.

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