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Blink 3 of 8 - The 5 AM Club
by Robin Sharma
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On the Edge summary
Nate Silver
The Art of Risking Everything
15 mins
Brief summary
On the Edge by Nate Silver delves into the complexities of risk and uncertainty, offering insights into how we can better understand and manage the unpredictable aspects of life through statistical analysis and forecasting techniques.
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On the Edge
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Key idea 1 of 5
Expected value, explained
Sometimes, the wisest bet is one you're probably going to lose. Don’t believe it? Then it’s time to talk about expected value.
Imagine a raffle where tickets cost $100 each, and there's a single grand prize of $1,000,000. If two thousand tickets are sold, your chances of winning are, naturally, slim – 1 in 2,000. Many people shy away from such long odds. After all, it’s quite likely you’ll be kissing that money goodbye. But let's break it down.
Expected value is the average outcome of a probabilistic event, over the long run. It takes into account the possible outcomes, their probabilities, and the respective gains or losses associated with them. In this raffle scenario, there are only two options per ticket. If you lose, you’ve spent $100 and you're down by that amount. But if you win, you’re up by $999,900.
If you combine the probability of each outcome with their payoffs, we get an expected value per ticket of $400. Despite the high likelihood of losing, the potential reward is so great it easily outweighs the cost of the ticket.
Does that mean you should always buy it? Not necessarily. If it’s your last $100 and without it you’ll starve, then definitely not. But if you can tolerate the risk, bets with positive expected value are exactly the ones that are likely to get you wins, in the long run.
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What is On the Edge about?
On the Edge (2024) explores the world of risk-takers who shape modern life, from poker players and hedge fund managers to venture capitalists and crypto enthusiasts. It delves into the strategies and mindsets of those who thrive in high-stakes environments, offering insights into how they navigate uncertainty and use risk to their advantage. Through a blend of storytelling and analysis, it sheds light on the art of risk and its pivotal role in today's rapidly changing world.
Who should read On the Edge?
- Entrepreneurs and business leaders facing strategic decisions
- Investors looking to systematize their thinking
- Anyone interested in understanding risk and uncertainty
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