I had intended to write this post in my personal journal, as a reminder to myself, but I am publishing it with the hope that it will be useful to others too..
We have this course called Decision Making under Uncertainty (DMUU); which basically teaches you to look at the expected payoff from any decision, before making a choice!
For example, If I have two choices,
one gives me a profit of ₹100 with a probability of 0.9 and a loss of ₹500 with probability 0.1
Doing nothing, means profit = 0,
A risk neutral person would go for the first one, since my payoff is ₹40, greater than the second case (figure 1)
Pretty basic stuff right? Well then I wonder why we fail to apply this to life!
If I look at the past, there have been multiple instances, where I have fallen for something I’d like to call the probability trap!
Probability Trap: Taking decisions based on Probabilities rather than on Expected Payoffs
“If I don’t read the case, I won’t be able to answer when I get cold-called, but the probability of that happening is very low; I’d rather use those 30 mins to sleep”
“I’ll leave the laptop open for just a minute, I think barely someone will be in office right now”
Decision making like this works for the case above, because the negative payoff or the downside is minmal. However, this kind of thinking may be harmful, even disastrous, when taking important life decisions.
If the possibility of a downside is very low, say 0.0001, but the magnitude of the loss is so big, that it can be equated to negative infinity ( – α), we may be tempted by the low probability to go ahead with the step,
but – α*0.0001 is still – α
It would be a wrong move! (figure 2)
The problem is, you never know how important the decision is, till the downside is revealed to you!
Cheating on an exam, for example, seems like a pretty harmless thing to do. I mean, what is the probability, that you get caught! But the problem is, that if you DO get caught, the resulting consequences (expulsion, humiliation for you and your family, your reputation loss) are too huge to take that risk!* And this holds true not just for the risk-neutral and risk averse, but also for the risk-loving people!
And we see and hear about this all the time!
In his book titled ‘How will you measure your life’, Christensen Clayton talks about a habit called “Marginal Thinking”…looking at the marginal payoffs for making a choice. He explains how looking at the just the marginal benefit from a decision may work well for businesses (most of the time), but can go terribly wrong in real-life application!
In the section on ‘How to stay out of Jail’, he cites examples of how this marginal thinking caused just one man – Nick Leeson to bankrupt Barings or how the Enron scam started with just one minor anomaly. That’s when it hits you, no one ever wanted to end up in this situation, no one wanted to ignore the downside, “just this once” as Clay calls it; but they did! Probably because of this very habit….
……and it would be stupid to assume that we are not vulnerable to this trap!
I was talking to a friend about this, and he suggested a method, that has worked for him so far: A list of things I will NEVER do (call it the Negative List) he says, that no matter how high the payoff, he will never do anything that is mentioned in the negative list. As long as he is refraining from all activities in the negative list, he can be reasonable sure his family and he will at least be alright!
I think that’s a really good way of looking at choices/decisions/opportunities/risks. I used a little liberty with his list and after a few additions/modifications, the list looks like this:
I will NEVER
1. Copy/Plagiarise/Cog – too much to lose, so little to gain
2. Falsify or wrongly claim something that I did not do
3. Do something that may harm someone, even a bit (you have no idea how much damage you have actually done)
4. Never put my name/brand/image at stake, however enticing the returns are; or I will PROTECT my brand at all costs
5. No drinking, no drugs, nothing that makes me lose control of my life beyond a certain point
6. Never let short term goals, affect the long term goals (includes career, family, relationships and friendships)
The real challenge, however, lies in internalising this list, and ensuring that I stick to it!
* This is addition to the fact that Cheating is considered unethical, by most schools of thought!