Expected Value Betting at Long Odds

“At its core, investment is, "putting resources, not limited to capital but possibly also human resources, into something based on the expectation that it will yield returns in the future," and investment always involves risks. However, there are investment opportunities where the relationship between risk and return is not balanced. Identifying these and investing where the return is greater than the risk is what investors do. I refer to this relationship between risk and return as "expected value." If the expected value is not high, there is no financial sense in investing. Being able to accurately assess this is a condition of a good investor.”

“For example, the calculation method for the 'expected value' when investing one hundred yen is as follows: -If there is a 20% chance it will become zero yen and an 80% chance it will become two hundred yen, then the expected value is 1.6 (0×20% + 2×80% = 1.6). -If there is a 50% chance it will become zero yen and a 50% chance it will become two hundred yen, then the expected value is 1.0. -If there is an 80% chance it will become zero yen and a 20% chance it will become two hundred yen, then the expected value is 0.4.”

“One thing which has built my personal fortune is my habit of guessing outcomes of investments and events. I think in terms of probabilities and ‘expected value’. For example, if I think investing in Venture X has a 30 per cent chance of making 50 times my money, I would prefer that to Venture Y, if it has an 80 per cent chance of making 10 times. The expected value of Venture X is .3 × 50 = 15, which is better than Venture Y, where .8 × 10 = 8. Of course, we need to invest money we can afford to lose, and be willing to take high risks.”

“Build expertise in a small niche that is growing fast. •  Tap your unconscious mind daily. •  Life is a book of bets. Make astute bets at long odds.”