This is Stevea Robbins.

Welcome to the get it done guys, quick and dirty tips to work less and do more.

In the previous episode, we looked at using expected value as a tool for decision-making under uncertainty.

It's a way to make sure you're taking enough risks and the right risks.

Instead of comparing best case and worst-case when making a decision, look at the expected

value, which is the probability of an event times the payoff from that event. Do research to

estimate your probabilities. Calculating expected values requires estimating probabilities and figuring

out what the payoff is of each possible outcome of the decision. Melvin saw what seemed to be an amazing deal, a two-year-old Toyota Corolla for $5,000

on Craigslist, quote, priced to move by a desperate seller, unquote.

He plans to buy it and sell it at a high price on a more leisurely time frame.

The seller, however, wouldn't let him see the car or get a mechanics report, and he must

wire the payment directly to a bank account in Nigeria.

Melvin figures there's a 5% chance that the ad is a fraud and worth $0,000, and a 95% chance

that it's worth $125,000, which he believes is the resale value of a Toyota Corolla.

Well, he calculated the expected value at 5%

times zero plus 95% times 125,000, or $118,750 minus the $5,000 purchase price for a total

expected value of $113,750. Who could pass up that expected value? Well, you and I should pass it up.

Melvin should pass it up. Melvin's gut feel is wrong, both for the probabilities and the value of the car.

Even with expected values, making better decisions does require some research.

Estimate probabilities intelligently.

To estimate probabilities, you can often find publicly available statistics.

If you're estimating the chances that a new company will survive for five years, for example,

...