Great post. Fantastic. Dutch booking, in particular, is fascinating — first time I heard it.
On a related note, I think there’s a particular type of error that smart people are actually more prone to make — discounting variance.
If I said,
“There’s some very real situations where taking a 99% chance of good outcome X produces better outcomes than taking a seeming 1% chance of 1000x” — nobody would disagree with that, it’s obvious on the surface. There’s secondary effects, morale effects, future resource allocation judgements, etc.
But suddenly, if you say,
“There’s some very real situations where a 99% chance of saving a life produces better outcomes than taking a seeming 1% chance of saving 1000 lives” — some people don’t accept that that’s ever true if you were certain your probabalistic estimates are correct.
Variance is a real thing. It matters. A lot. There’s many situations where a ‘W’ of any size helps get you to the next stage, whereas a “I followed good process but it didn’t work” does not — even among the most stoic, far-sighted, analytical, and rational of people.
The $5 for (googolplex of gains)*(likelihood of the googolplex outcome) has a terribly large amount of variance built into it. Sure, $5 might be below the “screw it” threshold, but as soon you as you substitute a number you can do something significantly large with — say, $10,000 — you start to recognize why you wouldn’t take the bet even if the EV is great on it. All the upside is caught up in the vanishingly small percentage of times that this highly unlikely positive event happens, and there’s a lot of much lower variance activities that produce good outcomes.
Great post. Fantastic. Dutch booking, in particular, is fascinating — first time I heard it.
On a related note, I think there’s a particular type of error that smart people are actually more prone to make — discounting variance.
If I said,
“There’s some very real situations where taking a 99% chance of good outcome X produces better outcomes than taking a seeming 1% chance of 1000x” — nobody would disagree with that, it’s obvious on the surface. There’s secondary effects, morale effects, future resource allocation judgements, etc.
But suddenly, if you say,
“There’s some very real situations where a 99% chance of saving a life produces better outcomes than taking a seeming 1% chance of saving 1000 lives” — some people don’t accept that that’s ever true if you were certain your probabalistic estimates are correct.
Variance is a real thing. It matters. A lot. There’s many situations where a ‘W’ of any size helps get you to the next stage, whereas a “I followed good process but it didn’t work” does not — even among the most stoic, far-sighted, analytical, and rational of people.
The $5 for (googolplex of gains)*(likelihood of the googolplex outcome) has a terribly large amount of variance built into it. Sure, $5 might be below the “screw it” threshold, but as soon you as you substitute a number you can do something significantly large with — say, $10,000 — you start to recognize why you wouldn’t take the bet even if the EV is great on it. All the upside is caught up in the vanishingly small percentage of times that this highly unlikely positive event happens, and there’s a lot of much lower variance activities that produce good outcomes.