The Tails
I’ve noticed that a lot of people make important decisions by trying to model an “expected outcome”.
- If I meet this person, what is the outcome likely to be?
- If I join this company, what is my equity likely to be worth?
This approach can sometimes work, especially if your model is accurate. But it’s more likely that you are not accurate. Most people aren’t, and crystal balls are not real! You don’t know for sure what the outcomes will be.
The other problem with this approach is that it does a bad job at articulating the weights of the tails. You end up overindexing on an expected outcome and overlooking the other things that could happen.
Another approach I’ve found worth trying is, in addition to mapping out your expected outcome, map out the worst case and the best case scenarios for a decision and then see how you are feeling about it. Just to be clear:
Worst case — what happens when everything goes very bad?
Best case — what happens when everything goes very well?
It would be difficult to map out all the outcomes of a decision, to make a fancy histogram simulating every possible path. That’s why it’s helpful to focus on the extremes. They are comparatively easy to think of, and they can give you a useful box (a floor and a ceiling) that all other outcomes must at least fit in between.
When you do this exercise, you may stumble upon a couple of things.
(1) The worst case is typically not that bad. And if it is really so horrifying, then the whole thing—no matter what your ‘expected outcome’ might be—may not be worth doing anyway. If you are skilled at robbing banks, the expected outcome of hitting your local Chase might be positive but the worst case is horrifying. [0]
(2) The best case is typically not that exciting. Not “you only live once” levels of excitement. So before you make a significant decision (like committing 60 hours a week of work for 4 years to a company), consider the best case. It would be great if the best case really does excite you, but you would be surprised how many people I meet aren’t even excited by the best case.
When you consider the tails, you may find that your thinking changes compared to when you focus on the expected outcome. I’ve found that doing this exercise has led me to pursue better ideas; ideas that, at the minimum, satisfy both of the tails.
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[0] If you are prone to catastrophizing or if you simply have a generous imagination, you can probably think up a “worst case" for any scenario that ends with you ruined, disgraced, dead, or something of the sort. (You could also think of a best case that ends up with you as ruler of the universe.) This way of thinking is not very helpful. When we say worst case and best case, we are referring to situations that could reasonably happen. For most people, the worst case of joining a 12-hour-per-day private equity job is that they get burnt out and quit, or that they get fired. The best case is that they become rich. The worst case, for our purposes here, is not that they get pushed out of a 18-story window by a disgruntled coworker. That could happen, but it’s so unlikely it’s not useful to consider.
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