Every day innumerable decisions are made by each of us. How do we do it? What is the framework for our decision making? This might inspire a blank stare or a silent pause. For many, if not, most of us the framework is the same as a casino gambler. The difference is that the casino gambler acknowledges and explicitly uses a probabilistic framework while most of us do so implicitly, including the casino patron once he steps away from the table.
Reactions to being told that the way in which you make decisions is the same as a casino gambler vary from confused to indignant. Let me explain. Can you accept the following definition: gambling- the exchange of value for the ownership of uncertain result in the future. This captures the standard table games like roulette, poker and blackjack, and sports books, presidential elections, as well as the sublime art of slot machines but it also captures how you make a decision at a restaurant, decide when to leave for the airport, how you give your friend a drink, whether you bring a umbrella with you and how you stock your refrigerator. Let’s walk through these examples.
Think about the way you look at a menu, narrow down the option based on your tastes, consider the prices and then place your bet; sometime you win sometimes you don’t. You decide by considering the relative costs and relative plausible payout; dish A. maybe a standby but dish B. maybe even odds at being ringer or a flop. The wager is the price (and time), the payout is the meal. You pick the best one to fit your preference for risk and reward.
When you go to the airport, how do you think about how you decide when to leave? You consider the ranges in travel times, the current traffic conditions and the chance there is a problem at the gate. Your wager is your time (and money), and the payout is having more time at home (or spending less time waiting at the airport). As a wise friend once said ‘if you never miss a flight you’re spending too much time at the airport.’
So you might be buying into the story a little by now; the thought may cross your mind that if you can figure out what the expected returns are on each situation then you know how to make your decisions or bets. It is not that simple. You are implicitly considering the distributional affects or what we can call risk. For example if your friend asks you to throw him a beer, but if all you have is glass bottles you walk across the room and hand it to him, not because you can’t throw and not because he can’t catch but because if you throw poorly or he misses a good toss you’ll spend the first half of the game cleaning up glass. Your expectation is that the bet would pay off (don’t have to walk across the room) but the risk is to great (don’t want to clean up after a clumsy friend) for that benefit. A similar story except with the opposite patterns is the practice of buying lottery tickets, you expect to lose, you even know that the expected value over time is negative but it give you a chance at being multimillion (A couple bucks a week may be a cheap cost for hope, however slight).
Well so you may now think that many things are like gambles but certainly not everything. I’m going to hold to my argument, everything should be thought of as a gamble. Think about going to the grocery store to stock up your refrigerator. Food that you are buying to consume right away is very similar to the restaurant gamble but what about standard staples like ketchup? We’ll the argument about trading value for an uncertain payout still holds but it’s fair to say that it’s a little spurious. How often have you gotten good or bad ketchup. The bet you taking is you converting interest on cash into an option to exercise for ketchup. Meaning when you spend the money your exchanged cash but now you have an inventory of ketchup, you’ve given up future interest on your cash but now on a whim you will be able to get ketchup. Same story is behind the bet when you bring an umbrella with you, you are paying by carrying it around but you receive an option to use it if it rains.
Now this does not mean that everyone should be making similar decisions, different personalities and endowments will change the way each of us look at the for risk and reward of a bet, but it does suggest that given you are taking bets with each action that if you think about these actions as bets explicitly rather than implicitly that you will make better decisions.
After a while you may stumble upon the realization that in a way playing roulette is the least risky thing you do, because in roulette the cost, probabilities, and payouts are clearly defined. It can be very hard to see the roulette wheel behind the life.
