Wednesday, May 23, 2007

Should I Stay Or Should I Go?

We got a lot of decisions to make in life. So how about I give you a concrete way to figure your way through them. Let's learn how to make a decision like a mathematician!

Here is the formula math pros would use for any decision that involves risk. And I use it all the time.


AG-Amount Gained
%W-Probability of Winning
AL-Amount Lost
%L-Probability of Losing

Let me explain: Basically what I do is determine what are the chances that I will win. And then think about how much I can win and how much I can lose. Then decide if I'm going to do it or not.

Still foggy? How about an example:

'Running a red light at two in the morning when the street looks clear'

First, what are the chances that I'll get caught? I'd say, about 5% chance. That means there's a 95% chance that I'll make it. Next is how much can I gain by running the light. To get that I'll make a scale of 1 to 10. 1 being slightly happy and 10 being practically having an orgasm I'm so happy. For running a red light I'd say about 3 since I won't have to wait.

For the last part I have to think about how much I can lose if i get caught. I'll use the 1 to 10 scale again. 1 being like getting pinched in the arm and ten being totally devastating my life. I'd say getting a ticket would be about an 8. So let's plug in the numbers and see what we get:

Here are our numbers:
Amount Gained w a Win- 3
Chance of Winning- 95%
Amount Lost w a Loss- 8
Chance of Losing- 5%

Remember the formula -
(Amount Gained x Chance of Winning) - (Amount Lost x Chance of Losing) = Expected Gain

(3 x .95) - (8 x .05) =
2.85 - .4 = 2.45

If my number is positive I can expect to win in the long run (2.45 EG is a great score btw). So in this case, if I wanted to act by the numbers, I should run every red light I run into at two AM when the street looks clear.

I've used this formula for just about every conceivable situation I've run into. It's kind of hard at first, but nowadays I do it almost subconcsiously. Of course, I don't always act on the numbers, but it always helps me put things in perspective.

Now all I did was scratch the surface. There's a lot of things that can complicate the situation.
If you or someone you know needs help with a big upcoming decision, contact me. I'll be more than happy to help you plug in the numbers and see what a mathematician would do!

Stay Sharp, Stay Happy.

Pictures courtesy of Flickr

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