I was first introduced to the game of poker three to four years ago, when I played a friendly game with my girlfriend’s family. It was the first time I had ever played, so I was pretty lost.
I played again with some friends a short while later, and there was one guy there who liked to play aggressively, especially near the end of the game. It always seemed like he had a hand, and it was difficult to play against him. He appeared very lucky and somehow always ended up with all of the chips.
I decided I wanted to learn more about the game and figure out just how this guy seemed to be so lucky all of the time, so I started to delve into some poker books and play online in order to test out my new ideas. Along the way, I was exposed to a bunch of new, unfamiliar terms, such as:
pot odds. equity. expected value.
These words basically all refer to the amount of money you can expect to win on each hand. They are big words, but they are very important concepts if you want to win at poker.
So, how does this tie into investing it wisely? Yesterday, I outlined the three primary resources that we have at our disposal: Our health, our minds, and our time. Everyone is blessed (or cursed) with the same, limited amount of time, but each and every one of us is born with different capacities of health and intelligence. Just like in poker, we are each dealt different hands in life.
However, as any poker player will tell you, it’s not only about the cards in your hand, but it’s also in how you play them. The reason my friend was able to consistently win even though we all had the same chance of getting any two random cards was that he knew how to play his hand. In the same way, even though we all have different hands in life, every day we have a choice of how to use the resources given to us; we can use them wisely, or we can fall into the same traps that many people fall into:
- We can spend all day watching reality shows, or we can choose to spend some time learning something new and interesting, and expanding our view of things.
- We can grow fat and lazy, or we can choose to take care of our bodies and our health.
- We can go into debt and squander our savings, or we can choose to invest our money wisely.
One set of choices increases our life’s expected value, while the other set decreases it.
Expected Value
So what is expected value? In poker terms, it’s the amount of money you expect to make off of the current hand. This not only includes the strength of your hand and draws, but can also include factors such as your odds of bluffing the other person out of the hand and how much money is already in the middle, waiting to be won.
In life, expected value refers to the value that we can get out of our lives; the higher our expected value, the more rewards and personal satisfaction we will gain in the future. It is about maximizing one’s own potential for growth.
Personal Dreams and Goals
It is one thing to talk about the potential for growth, but in order to grow, there must be a reason for doing so. There’s gotta be something that you feel passionate about, in order to have the motivation needed to get there. If you are not currently passionate about anything, then it’s time to start evaluating your life situation, thinking over what you like and dislike, and getting emotional about something.
For me, one of my dreams is to get out of the rat race before I’m an old man. What this means to me is getting to the point where I no longer need to work at a job because I need the money to pay the rent, the car, the groceries, etc…; I am at the point where I have enough assets and passive income to do that job for me, so that I can spend my time working on what I truly enjoy, rather than working to keep the wheels of the cage turning. If I can reach that day while I’m still relatively young, then that would be incredible.
In order to get to that point, I will need to invest my own assets and resources wisely, so that every day is an increase in my expectation, rather than a decrease!
How about you? What are your dreams and goals? What gets you passionate and motivated to constantly improve yourself and work to achieve your goals?
What gets me motivated is the goal of financial independance. Not having to worry about quality of life or income sources if I lose my job. It is achievable, the hard part is to reach the goal while relatively young in order to enjoy it!
Kevin, I agree with you that the inputs variables such as Eating Healthy, Saving Money, etc. have an impact on the expected value, yet there are some major factors missing such as the volatility associated with each independent variable and the fits of the independent variables on the regression. In that case, the independent variables would be Eating healthy, Amount of saving, Time used efficiently and the dependent variable would be the Expected value. If you run a regression with all of these variables, do the variables directly influence the expected value? by how much? Are they significant? Is there correlation between two independent variables? If so, do they multiply or cancel out their effects on the expected value? We won’t know unless we run the regression and have significant betas. As you stated: “In life, expected value refers to the value that we can get out of our lives; the higher our expected value, the more rewards and personal satisfaction we will gain in the future.” It sounds to me that you are saying the expected value is the independent variable that directly causes the value of satisfaction; however, the “expected” value itself is unknown, and it can only be estimated with predetermined factors and the volatility associated with each factor. In mathematical terms, the regression should looks like this:
EV=α+β1 (EH) +β2(S) + β3 (EUT) +…….
EV: Expected Value
α: Alpha, the coefficient measuring the expected value arising from specific risk. In another word, it is the expected value if the coefficients of other independent variables are zero.
β: Beta coefficient, the volatility of independent variables.
EH: Eating healthy
S: Amount of savings
EUT: Efficient Use of time
In order to have a more solid argument to back up your statement on expected value. A better approach is to find all the independent factors that have direct and positive impact on the expected value. By doing so, you will find how well your independent variables fit into the regression. This process will make you run the regression several times and omit the independent variables that are statistically insignificant and the ones that are largely correlated with other independent variables. This involves repetition of tests and trials. Therefore, by simply stating that the higher the expected value the more rewards and personal satisfaction is a thin statement.
Hi Winnie,
Thank you for commenting on my blog. If I understand your point correctly, you are basically saying that we cannot simply assume that if we have more savings, if we eat healthier, etc… that an increase in our life’s expected value will follow. There is not necessarily a direct correlation because other factors may be at play. If this is what you were trying to say, then this is a valid point. We cannot look at someone and say, “Ok, since you cut out the McDonald’s your life is now worth $50,000 more to you”. I agree with you; not only can we not put a direct monetary value, but we can’t even say for sure that cutting out the McDonald’s will improve expected value, although there is a good chance that it might. You’re right; it doesn’t really work like this.
What “eating healthier”, “savings”, and “efficient management of time” do give you is power to achieve your goals. It is this power that increases your ability to achieve what you want in your life, and therefore raises your expected value. “Expected value” in this case is actually a personal determination, and represents your personal level of happiness and the goals you have achieved. It is an internal, intrinsic feeling, and therefore something not directly measurable, but only seen and influenced via other factors.
In the end, it is up to you, so just because you have money or are eating healthy doesn’t mean you will make wise decisions in your life. However, if you have the will and the desire to achieve something good, then having a tree of savings and having a healthy body and mind will help give you the power to get there.
I hope this helps clear it up a bit, and I definitely will be following up on this in a future post. Thanks for the feedback!
Kevin,
It is +EV for me to comment on your blog, because it will stop you from hassling me about it, haha. Jokes aside, I am glad to see someone shares my philosophy. As the King of EV, I am going to attempt to throw a few thoughts out here. First of all, to address Winnie and Kevin’s reply to her post, I am going to use poker as an analogy.
Expected value is “expected” value. You raise with pocket aces, because based on what you know, you expect this to be the best move. By the same token, we should be eating healthy and saving, because we expect those things to increase our value of life. Some of us sit around watching TV at night even though we expect it to be the least worthwhile thing we could be doing. Trying to constantly do what we expect to be +EV should be the aim.
EV=α+β1 (EH) +β2(S) + β3 (EUT) +……. is the equation Winnie presented. However, I feel a few more variables should be added. For each thing we could do, there should be a variable that represents our expectancy that a particular thing could increase our rewards and our personal satisfaction. The true statement should be the higher our expected value, the more rewards and personal satisfaction I expect to have. This leads us to the fact that we can never be sure that what we are doing is worthwhile. Pocket aces can lose.
A last note would be to remember that the ultimate goal is not to simply complete +EV tasks. The ultimate goal is, to put it in a mathematical-looking equation, max(+EV). This is because there could be many +EV opportunities in front of you and some of them could bring significantly more value than others. And to end this…
What are you talking about? You ARE an old man.
Regards,
J
PHD in EV
Johhny! You finally wake up after all of this time!
Your description of what +EV means and how it applies to our lives is pretty spot-on, if a little esoteric. I look forward to reading more of your comments in the future and engaging in some quality discussions 🙂