Hey !

Although we often confuse these two, decision and outcome are completely different things.

If the outcome is positive, we say we made a good decision. If the outcome is negative, we say we made a bad decision.

But that's nonsense!

You can make a great decision and end up with a terrible outcome, and vice versa.

For example, playing the lottery is a bad decision every single time because the overwhelming odds are you will never win a jackpot, even if you buy a lottery ticket every single day of your life.

It's pure statistics & probability.

But some people (which is ultra rare) end up hitting the jackpot and winning millions of dollars. That's an amazing outcome for them, but they still made a bad decision.

It's just one example -- and your entire life is about making decisions with uncertain outcomes.

The difference between playing the lottery and making decisions in your life is that you don't know the probabilities for the latter.

Onward.

Let's have some fun -- I have a game for you !

If you're interested in game theory, you'll definitely like this example. (Note: If you haven't heard about it before, a simplified definition of game theory is basically, "how to make decisions".)

We recently had SuperBowl LV, where Tampa Bay Buccaneers challenged the defending champs and bookmaker favorites Kansas City Chiefs.

Months ago, I bet €25 on Tampa Bay Buccaneers winning the SuperBowl and the payout was €193.75. Remember, this was months ago, while they were not even close to going to the playoffs.

But they managed to win 6 out of the last 7 regular season games (the only loss came against the Chiefs), enter the playoffs as a wild card team and proceed to beat Washington, New Orleans and Green Bay (all 3 games on the road) and go to the SuperBowl LV in their own stadium (first time in history a team played the SuperBowl at home).

So I was just 1 game away of winning €193.75 and pocketing a cool €168.75 in pure profits.

There was just one problem...

Tom Brady and the Tampa Bay Buccaneers had to beat Kansas City Chiefs in order for me to get that money. If they lost, I'd get nothing. Zero. Nichts. Nada.

So I got the idea to hedge the bet! Which means betting on Kansas City winning and securing a profit no matter who wins the big game.

In this case, with game-day odds being 1.65 (for Americans: -153.85) on Kansas City. So I'd have to bet €117.5 on them winning in order to get roughly the same payout as I would if Tampa won.

Before we go on to the calculations, here are a few details you should know:

1. Most of the experts agreed the Chiefs would (easily) win the game.
2. ESPN's analysis gave Buccaneers a 47% chance of winning.
3. The game day odds implied a 40% probability of Buccaneers winning.

Here are the calculations:

Option #1: I do nothing and hope the Buccaneers win the game.

• Bet: €25
• Strategy: Don't hedge
• Payout: €193.75
• Profit: €168.75

Option #2: I hedge the bet and get the money no matter who wins.

• Bet: €25 + €117.5 = €142.5
• Strategy: Hedge.
• Payout: €193.75 (if the Buccaneers win) or €193.88 (if the Chiefs win)
• Profit: €51.25 (if the Buccaneers win) or €51.38 (if the Chiefs win)

Option #3: Anything in between.

What would you do ? If option #3, tell me exactly what and why.

You don't have to reply, but just think about what you would do.

Do that before you scroll down because I'll reveal the solution.

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What did I do? I chose option #1.

And as you probably know, the Buccaneers destroyed the Chiefs, Tom Brady got shitfaced with tequila at the parade, threw the trophy off the boat, couldn't even walk on his own... and I got the money.

So it was a good decision, right?

No, it was a good OUTCOME. But let's explore whether this was a good decision.

So the bookmakers gave Tampa a 40% and ESPN's analysis gave Tampa a 47% chance of winning. Let's use both probabilities.

Hedging the bet: €51.38 or €51.25 profit no matter who wins

Not hedging the bet (47% chance): €79.31 expected profit

(193.75 - 25 * 0.47 = 79.31)

Not hedging the bet (40% chance): €67.50 expected profit

(193.75 - 25 * 0.40 = 67.50)

So even if we take the more pessimistic 40% chance, not hedging the bet was a better decision. And more specifically, it was a better decision by at least 31.37%. Because the expected profit was that much higher.

Statistics baby!

Was this a fun example? Let me know!

I recently learned this "decision is not the same as outcome" philosophy from Derek Sivers. It surprised me a little but he is 100% right. Derek also says, "we only learn when we're surprised".

His website is sive.rs (what a cool domain name!) and he loves meeting new people from all around the world. Feel free to send him an email!

See you around,

-Filip

P. S. I was in a similar situation 2 years ago, for SuperBowl LIII. Actually it was the same situation, but with different teams and different odds (and Tom Brady won again). I decided to hedge the and it turned out to be a good outcome again. But more on that some other time.