From Annie Duke’s book “How to Decide“
Why is it important to use probabilities in decision making?
- “Adding probability estimates to the decision tree will significantly improve the quality of your decisions versus simply identifying the possibilities and your preferences. To make better decisions, you have to consider the likelihood of any outcome occurring, including the ones you prefer and the ones you want to avoid. Without taking this extra step, it is difficult to assess the quality of any option on its own, and even harder to compare options.” (p. 91)
- “To figure out whether a decision is good or bad, you need to know not just the things that might reasonably happen and what could be gained or lost, but also the likelihood of each possibility unfolding. That means, to become a better decision-maker, you need to be willing to estimate those probabilities.” (p. 79)
- “This way of thinking, that there is only “right” and “wrong” and nothing in between, is one of the biggest obstacles to good decision-making. Because good decision-making requires a willingness to guess.” (p. 81)
- “That’s part of why it’s so important to good decision-making to ask yourself about the possibilities, the payoffs, and the probabilities that the future will unfold in various ways. It forces you to assess what you know and seek out what you don’t.” (p. 94)
- “That’s also true of decision-making. Even if you aren’t explicitly thinking about the set of possibilities, your preferences, and the probabilities, you are still making these estimates. Implicit in any decision is the belief that the option you choose has the highest probability of working out better for you than the options you don’t choose. Therefore, whether you acknowledge it or not, making a decision is making a guess about how things might turn out.” (p. 85)
State probabilities so people don’t misunderstand you.
- Studies have shown people misinterpret terms like probably, most likely, good chance, frequently, and other terms. To make sure there is no confusion, express your thoughts with probabilities. You don’t want people to misunderstand you.
“common terms really are blunt instruments to express probabilities. They are inherently ambiguous, reflecting a broad target area. Of course, this is part of why people like to use them. When you use an ambiguous term, you feel like you have a lot more leeway if you’re worried about being “wrong.” That leeway, however, comes at a steep price: others might interpret those terms differently.” (p. 105)
(Example: “When President Kennedy approved the CIA plan to overthrow Fidel Castro (known as the Bay of Pigs invasion), he asked his military advisers for their opinions about whether the attempt would succeed. The Joint Chiefs of Staff told Kennedy the CIA’s plan had a “fair chance” of success (which the writer of the assessment considered to be 25%). Because Kennedy thought “fair chance” meant something much higher, he approved it. The plan was a failure, which looked clumsy and amateurish, and embarrassed the United States at a key moment in the Cold War.” (p.106)) - “If you communicate what you mean with precision, using probabilities expressed as percentages, the disagreement is immediately revealed. If I say something has a 30% chance of happening and you say it has a 70% chance of happening, we know we disagree. There is no ambiguity.” (p. 105)
- “If you believe something has a 30% chance of happening and you’re talking with someone who has reliable information that it has a 70% chance of happening, it is helpful to uncover that disagreement. You need the information that lives in their head to correct your belief. A failure to extract that information is a missed opportunity, and any decision based on your estimate will be lower quality as a result.” (p. 105)
How do you make predictions in probabilities?
- Click on this link to find out how.
Example of using probabilities to help you choose between two candidates.
Your goal is to hire a candidate who will most likely work in the company long term.
More good quotes:
“You buy stock in an electric car company. It quadruples in price. You’re patting yourself on the back for a great decision. But if the chance that the stock would quadruple was tiny, while the chance that the stock would go down in value was huge, should you be taking so much credit?” (p. 79)
“Every time you get in a car, you’re risking a big downside: getting in an accident and dying. Of course, you take that risk because the probability is so small that the upside (time saved, increased productivity, etc.) compensates for it. Likewise, even though you could win a fortune in the lottery (against losing only a dollar), the chances of winning are so small that it’s not worth risking the dollar.” (p. 79)
“It may be scary to open yourself up to the precision and accountability of making a specific estimate, but it’s well worth it to try. As any archer will tell you, the more you train your sights on that bull’s-eye, the more likely you are to hit it (and the more likely you are to get closer and score more points).” (p. 107)