Letter 120: The EV of Everything
Applying the framework of Expected Value to your entire life (almost)
Way back in Letter 56 I wrote a throwaway line saying the topic of thinking in probabilities deserved an entire post dedicated to it, and then I never got around to writing the post. A reader reminded me of this recently (thank you, you know who you are), so today we're finally doing it.
I was a professional poker player for 15 years, and if I had to pick the single most valuable thing the game gave me, it wouldn’t be the money, or the freedom, or the stories, or anything else. It would be one concept: expected value.
Poker players shorten it to EV. Once it gets into your head, you start seeing it everywhere. It becomes the operating system underneath every decision you make.
So today I want to explain what EV is, how I apply it to basically everything, and also (because this part often gets skipped) where the framework falls apart.
What EV is
Expected value is the average outcome of a decision if you made the same decision an infinite number of times.
Simple example. I offer you a coin flip. Heads you win $200, tails you lose $100. Half the time you win $200, half the time you lose $100, so on average each flip earns you $50. The flip is +EV. You should take it, and you should keep taking it as many times as I’m silly enough to offer it.
Note what EV does not say. It does not say you will win. You might lose the flip. You might lose five in a row. You might lose 20 in a row! EV says nothing about any individual outcome. It only tells you whether the decision was good.
This is the part most people never internalise, and it’s the part poker beats into you whether you like it or not. In poker you’ll make the “correct” play and lose the hand constantly. All day, every day, for years. Eventually your brain rewires itself and you stop judging decisions by their outcomes and start judging them by their quality (the same concept is behind my popular Infinite Regret post from a few years back).\
The failure to do this leads to results-oriented thinking, and it is considered one of the deadliest leaks in poker.
It’s one of the deadliest leaks in life too.
EV in the wild
Once the concept settles in, you notice almost every decision has an EV attached to it, whether or not anyone bothered to calculate it.
Insurance is negative EV. It has to be, otherwise insurance companies wouldn’t exist. You pay more in premiums, on average, than you receive in payouts. I still buy insurance, and I’ll explain why in the section on where the framework breaks.
Lottery tickets are horrifically negative EV. Roughly half your money evaporates the moment you buy the ticket.
Wearing a seatbelt is one of the most +EV actions available to a human. The cost is two seconds of mild inconvenience. The payoff, in the rare cases it matters, is your life.
Asking a question in a group setting when you don’t understand something: +EV. Small social cost, occasionally large informational payoff, and half the room had the same question anyway.
Going to the gym, backing up your files, getting the weird mole checked, spending ten minutes preparing before an important call. All +EV. None of them guarantee anything. A gym session doesn’t promise you health any more than pocket aces promise you the pot. You are simply buying better odds, over and over, and letting the long run do its thing.
And of course, investing. Every position in my portfolio is, in my head, a bet with a probability distribution attached. In last week’s letter I ranked five tokens on forward looking expected value, and this is genuinely how I think about all of them. PRISM sits in my portfolio as a lottery ticket where I think I’m paying less than the ticket is worth. PHA is a patience trade where the odds are decent but the timeline is long. I don’t know which ones will work. I don’t need to. I need the collection of bets, sized correctly, to be +EV in aggregate.
You don’t need the numbers to be exact
A common objection: “but I don’t know the exact probabilities in real life.”
Correct. Neither do I. Outside of casinos and coin flips, nobody does.
The good news is you don’t need exact numbers, because the alternative isn’t precision, the alternative is vibes. Even rough EV thinking beats no EV thinking. When I estimate a 30% chance of something, the true number might be 20% or 40%. Fine. I’m still miles ahead of the person operating on “it’ll be right” or “it feels risky”.
Over time this becomes automatic. Picking a queue at the shops is an EV calc. Trolley volume, cashier speed, etc. Same thinking for deciding whether or not to switch lanes in traffic because one seems to be moving faster. Or for my golf-sympathetic readers, you could imagine an EV calc for deciding whether to go for it and hit a shot over water vs laying up, or hit a shot through the trees vs punching out.
These are all relatively small decisions, but multiply them by the thousands of decisions you make each year and the compounding is enormous. A person who makes slightly +EV choices across their health, money, career and relationships will, over a decade or two, end up in a wildly different place to a person who doesn’t. Same as the slightly better poker player over a million hands.
Where the framework breaks
This is arguably the most important part to understand.
EV thinking has many failure modes, and I’ve fallen into every one of them.
The first is ruin. EV is an average across many repetitions, but some bets you only get to make once. A coin flip for your entire net worth at 2 to 1 odds is +EV and you should basically never, ever take it if your net worth is anything significant. Averages are meaningless to the player who busted out. This is why bankroll management exists in poker, and why position sizing exists in investing, and why I try to never put ruin on the table no matter how juicy the odds look. Survive first. Be +EV second.
The second is false precision. Assigning a number to something makes it feel rigorous, even when the number came from the same gut feeling as the vibes it replaced. “I estimate a 65% chance this token 5xs” sounds analytical, but often it’s just wishful thinking and hopium. I catch myself doing this most with positions I’m already attached to, where the EV maths mysteriously always comes out in favour of the thing I wanted to do anyway. EV frameworks are only as honest as the inputs you feed it.
The third is unquantifiable value. Back to insurance. Negative EV in dollar terms, yes. But EV in dollars ignores the sleep I get knowing a disaster won’t wipe us out, and it ignores the brutal maths of diminishing returns: losing everything hurts far more than the equivalent gain helps. Some things are worth paying a premium for, and peace of mind is one of them. The dollar EV and the life EV of a decision are different numbers, and the second one is the one you’re supposed to be maximising.
And the fourth, the big one: some areas of life are actively damaged by the framework. I said this in Letter 56 and I stand by it: nobody wants a partner who thinks there’s a 94% chance they love them. Friendship, marriage, etc. There are things that go beyond EV calculations. The whole point of loving something is you’ve stopped keeping score. Run the EV on all of your relationships and you’ll end up with a spreadsheet and no one to show it to.
Putting it together
So here is how I’d summarise 15 years of poker and another chunk of years applying it to everything else:
Judge decisions by their quality, not their outcomes. You will make good decisions and lose. This is normal and it means nothing.
Rough probabilities beat vibes. You don’t need precise numbers, you need to be directionally honest about odds and payoffs.
Never bet ruin. A +EV bet you only survive one side of is usually a bad bet. Size everything so you always get to keep playing.
Watch for wishful thinking. If your EV estimates keep endorsing what you already wanted, the estimates are the problem.
Know where the framework ends. Money and decisions, yes. People you love, no.
The meta lesson, if there is one, is a framework is a tool and not a religion. EV made me a living at poker, and it shapes nearly every financial decision I make today. It’s also, deliberately, switched off for the parts of my life I care about most.
Try and be an investor, not a gambler.
And with the people around you, try and be neither.
As always, thank you for reading, and leave any questions or comments below :)
Disclaimer: The content covered in this newsletter is not to be considered as investment advice. I’m not a financial adviser. These are only my own opinions and ideas. You should always consult with a professional/licensed financial adviser before trading or investing in any cryptocurrency related product. Some of the links shared may be referral links.