A Bird in the Hand

You have a choice. First option, we flip a coin, if you call it correctly before it hits the ground - you get $250. Call it wrong, you get nothing. Second option, we don't flip a coin, and we just hand you $100. Which option would you choose?

If you are like 82% of the general population - according to a Georgetown University study, you would take the $100. A bird in the hand being what it is, people tend to prefer the sure thing ($100) over a gamble ($250 or $0). Those who take the sure $100 are quick to point out they are a guaranteed winner. The fallacy in their logic is they are focused on the result, and not the choice. In life, the choices you make are far more important than the results.

For example, You could choose to run all the red lights on your way to work tomorrow. It is entirely possible you get there without an accident. Would that mean your choice to run all the red lights was a good one? Of course not, you got lucky. Or consider the flip side, you drive to work, obey all the traffic laws, but this time you get in an accident. Does this mean your choice to follow the traffic laws was a bad one? Of course not, you just got unlucky. Somewhere between making choices, and seeing the results of those choices, uncertainty (luck) will often have some influence.

So wouldn't taking the sure $100 minimize the influence of luck, thus making it the better choice? While it would minimize the influence of luck, it also limits the potential reward. Occasionally, minimizing luck is the prudent thing to do. However, there is also a time and a place where accepting risk, is the prudent thing to do. This coin flip scenario is definitely the latter. Mathematically, flipping for the $250 is a no-brainer, and not just because Bagholder knows how to correctly call coin flips (see footnote).

The proper way to calculate risk is to look at what is called the Expectation Value (EV). In this instance, it is the percentage chance times the reward, of every possible result, added together. So, flipping a coin for the $250 is calculated as (.5 x $250) + (.5 x $0) = $125 EV ..... whereas taking the sure thing is calculated as (1.0 x $100) = $100 EV. Looking at this problem through the lens of EV allows us to clearly focus on the compelling math. We can flip for an expectation of $125, or we can safely opt out, for only $100.

Eliminating risk is not the only reason most folks are inclined to opt for the sure $100. Human beings have an innate psychological desire to be in control. Allowing the gods to decide your fate with a coin flip, leaves one feeling more like passenger than driver. Exercising some freewill, and choosing the sure $100 locks in a $25 loss, but hey, it does come with agency. Embracing the concept of EV, is the mechanism needed to make it easier for the psyche, to comfortably part with control. It puts the power of math on your side. No faith is required, just understanding.

But Bagholder - doesn't accepting risk open the door to possible ruin? Yes it does, but simply put, there is no wisdom in summarily closing the door on risk. Just ask any successful entrepreneur. They understand risk needs to be acknowledged, calculated, and managed. Sometimes, it is easy to quantify, like with the coin flip example. Other times, accepting risk means trading in the anchor of certainty, living life untethered, accepting the lower lows, and riding the higher highs. Is there really any better way to go through life?

Admittedly, risk taking does not come natural for most people. While the possible rewards can be seductive, the potential downsides can be discouraging. It is very difficult to reconcile the idea that with risk, you can do everything right, and still fail. We all want to believe there is justice in this world, one where good decisions lead directly to good results. Unfortunately, that is not always the case. Until that world exists, the best any of us can do, is make good choices, manage risk, and let the results take care of themselves.

Footnote: Bagholder was in the pawn business in the late 80's. We had a guy interested in a gold chain marked $2,500. He offered $1,500. We went back and forth for awhile, but he wouldn't come off the $1,500. Finally, the guy says "how about we flip for it, you win - I pay the $2,500 you have it marked...and if I win, I get it for the $1,500". Went back into the office, and talked to the owner. To protect the innocent, we will call him, John. He had some gamble in him, and figured worst case, the shop gets $1,500 for a chain which melted at $1,300.

So John went out front, had the guy put $1,500 cash on the counter, another pile of $1,000, and the chain next to that. He pulled a quarter out of his pocket, and told the customer to call it while it was in the air. John flipped the coin, the guy clapped his hands in excitement and said "Heads on the ground baby!!" The coin rolled around, and finally stopped heads-up. The customer grabbed the $1,000 and the chain, and bolted out the door. John shrugged & counted the $1,500.

It was at this point, moments after the guy left, Bagholder pointed out, had the coin landed tails up, the customer could claim victory because the head side of the coin would be touching the ground - as specifically stated in the call of "heads on the ground.” John, dismissed my assertion immediately, and ridiculed my lack of faith in humanity. Bagholder is still convinced today, 35 years later, that customer intended to claim victory regardless of the way the coin fell. Unfortunately, we will never know. What we do know here at Mytwocent$ is, should Bagholder ever be involved in a coin flip for $250, the call will be an easy one.