The most important formula in risk taking is the formula for expected value. It is simply defined as
winning percentage * average winner – losing percentage * average loser
It is obvious to some and unknown to others, but having positive expectancy is the single most important thing in gambling, investing, risk taking, and heck… life itself.
This formula alone can keep you in the black and drastically improve your results in life (in a lot of aspects).
What the hell is positive expectancy? Well, in short, it is the expected value you should expect to earn if you were to place a wager with these characteristics (win rate, payoffs, etc.) a repeated number of times. You may not win every bet, but after a large number of positive expectancy bets you *should* converge to the positive expectation. This is one of the only things risk takers can control!
However, what most do not realize is that a winning percentage less than 50% can still result in positive expectancy!! Let’s run through some simple examples so you can see and next time you consider taking a risk ask yourself do I have positive expectancy or am I doomed from the start?
Finally, the best way to use expected value is to determine – if limited capital – which bets should be placed or prioritized. In theory, the one with the highest positive expected value should be prioritized first.
Example 1: 67% * 200 – 33% * 100 = $100
Example 2: 55% * 300 – 45% * 100 = $120
Example 3: 45% * 500 – 55% * 100 = $170
There is a relationship between payoff size, win rate, and the number of bets you can place with similar characteristics. For more information please check out the FREE crash course or gamble on yourself and invest in the full Basics to Calculated Risk Taking Course.